Prepared by MERRILL CORPORATION www.edgaradvantage.com
QuickLinks-- Click here to rapidly navigate through this documentUNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549
FORM
10-K10-K/A(Mark One)
ý Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the fiscal year ended December 31, 2002
oTransition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the transition period from to .
(Mark One)/x/Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the fiscal year ended December 31, 1999/ /Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the transition period from to .Commission File Number 0-22718
ZAMBA CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Delaware
Delaware
41-1636021(State or Other Jurisdiction of
Incorporation or Organization)41-1636021(I.R.S. Employer
Identification No.)
7301 Ohms Lane,3033 Excelsior Blvd, Suite 200, Minneapolis, Minnesota55439
55416(Address of Principal Executive Offices, including Zip Code)
Registrant'sRegistrant’s Telephone Number, Including Area Code: (952) 832-9800(612) 832-9800Securities registered pursuant to Section 12(b) of the Act: None
NoneSecurities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
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/ý NO/ /o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best ofregistrant'sregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES o NO ýThe aggregate market value of
votingthe registrant’s common stock held by non-affiliatesof the registrantwas approximately$378,675,005$6,800,000 as of June 28, 2002, based on the closing sale price on the NASDAQ National Market for that date. For purposes of this disclosure, shares of common stock beneficially held by the registrant’s directors, executive officers, and holders of more than 10% of theCompany's Common Stock as reported onoutstanding shares of theNasdaq National Market on February 22, 2000registrant’s common stock are assumed to be affiliates.
The number of shares outstanding of the
registrant'sregistrant’s common stock, as ofFebruary 22, 2000: 31,273,523March 21, 2003, was 38,822,679 shares.DOCUMENTS INCORPORATED BY REFERENCE
(1)Portions of the Proxy Statement for the registrant’s Annual Meeting of Stockholders to be held on
May 18, 2000,June 5, 2003, are incorporated by reference into Part III of this report.
DisclaimerCautionary Statement Regarding Forward-Looking Information
Certain statements in thisreportAnnual Report on Form 10-K are"forward-looking statements"“forward-looking statements” within the meaning of Section 27A of thePrivateSecuritiesLitigation ReformAct of19951933 andinvolve knownSection 21E of the Securities Exchange Act of 1934. You can identify these forward-looking statements by our use of the words “believes,” “anticipates,” “plans,” “expects,” “may,” “will,” “would,” “intends,” “estimates” andunknown risks, uncertaintiessimilar expressions, whether in the negative or affirmative. We cannot guarantee that we actually will achieve these plans, intentions or expectations. Actual results or events could differ materially from the plans, intentions andother factorsexpectations disclosed in the forward-looking statements that we make. These statements are only predictions. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, and/or performance of achievements. We do not assume any obligation to update any forward-looking statements that we make, whether as a result of new information, future events or otherwise.Factors that may
cause the Company's actual results, performance or achievements to be materially different from the results, performance or achievements expressed or implied by the forward looking statements. Factors thatimpactsuch forward lookingforward-looking statements include, among others, the growth rate of thecustomer caremarketplace for customer-centric solutions, our ability to develop skills in implementing customer-centric solutions, the ability of our partners to maintain competitive products,our ability to develop skills in implementing customer care packages from additional partners,the impact of competition and pricing pressures from actual and potentialcompetitioncompetitors with greater financial resources than we have, our ability to obtain large-scale consulting services agreements, client decision-making processes, changes in expectations regarding the information technology industry, our ability to fund operations, our ability to hire and retain competent employees, our ability to make acquisitions under advantageous terms and conditions, our success in integrating acquisitions into our business and our culture, and possible costs incurred related to the integration, our ability to grow revenues from acquired companies, possible changes in collections of accounts receivable, changes in general economic conditions and interest rates, changes in information technology spending within companies, changes in the global geopolitical situation, sales of our NextNet shares, and other factors identified inthe Company'sour filings with the Securities and ExchangeCommission.Commission, including the factors set forth on Exhibit 99.01 to this Annual Report on Form 10-K.Item 1.
BusinessBusiness.Our Company
Our mission is to be the premier customer care services company and help our clients be more successful in acquiring, servicing, and retaining their customers
ZAMBA Corporation is a customer care services company. We help our clients be more successful in acquiring, servicing, and retaining their customers. Having served over 300 clients, ZAMBA is focused exclusively on customer-centric services by leveraging best practices and best-in-class technologies to enable insightful, consistent interactions across all customer touch points. We providebusinessesstrategy and business process consulting, as well as customization and systems integration for software applications, which we call “packages,” that our clients purchase from third parties. Based on our expertise and experience, we have created a framework of interdependent processes and technologies to help our clients, including strategy, analytics and marketing, contact center, content and commerce, field sales, field service and enterprise integration. These help our clients to implement standard methods for interacting with their customers, by integrating multiple technology-based sales, marketing, and service channels, such as the Internet, telephone, fax, email, wireless, and direct.Our specific solution offerings include:
• Strategy & Alignment – This helps organizations in the creation of a customer-centric vision that is in alignment with their business strategies. It defines the processes of change management and enterprise transformation necessary for the successful execution of the strategies in business. This offering results in the development of a business case and a comprehensive roadmap, detailing specific customer care solutions that will provide consistent and integrated customer experience models and business processes;
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•Customer Care Diagnostic – This helps organizations assess their progress toward achieving the desired customer centric model and identify ways to generate tangible business benefits for their investments.
•Analytics & Marketing – This helps organizations build a comprehensive repository of customer data, prepare that data for use through a variety of data analysis and data mining techniques, and then apply the insights developed to online and offline marketing activities, based on predictive models and real-time reactions to customer behaviors;
•Content & Commerce – This advances brand awareness and enhances multiple touch points by enabling enterprises to market and sell directly to customers online through the efficient creation, management and delivery of personalized transactive content, products and services;
•Contact Center – This helps organizations engage their customers in a multi-channel customer interaction center that provides superior service and consistent experiences, as well as cross-sell and up-sell activities via live agents or automated interactions;
•Field Sales – This allows organizations to shorten sales cycles and increase the probability of sales success through effective contact, lead, activity, opportunity, pipeline, account, commissions and territory management;
•Field Service – This helps organizations more efficiently provide customer service and support through the management of service requests, workforce scheduling, contracts, repair process tracking, service part usage, ordering and return, and defect tracking and reporting; and
•Enterprise Integration – This enables the design and implementation of unified business processes and technology systems across the extended enterprise in order to link customer facing applications to one another, as well as to other systems, including Enterprise Resource Planning (“ERP”), supply chain and legacy, thereby aligning organizational processes and functions to deliver value to customers.
Prior to 1998, we derived a substantial amount of our revenue from the sales of proprietary hardware and software that originally enabled data communication over specialized mobile radio (“SMR”) technology and, eventually, most types of wireless networks. In September 1998, we completed our acquisition of the QuickSilver Group, Inc. (“QuickSilver”), a customer care consulting company specializing in software package implementation for call center management, sales automation, marketing automation, and automated field service and field sales. This acquisition enabled us to expand our consulting and systems integration
services to deliver integrated "Customer Care" solutions to their customers. Our solutions help businesses attractcapabilities andretain customers by improving their interactions with customers during sales, marketing, customer service,geographic presence.In 1998, less than 4% of our revenue was derived from the sale of proprietary hardware and
other business functions.software. Since 1999, less than 1% of our revenue was derived from the sale of proprietary hardware and software. Wedeliver Customer Care solutions innow exclusively provide customer carestrategy, customer intelligence, e-business, front-office applications, contact centers, wirelessservices as described above.We currently derive a portion of our revenue from sales outside the United States. Approximately 11% of our 2002 revenues and
mobile technology, branding, performance improvement and support services. To us, "Customer Care" means ensuring that10% of our 2001 revenues were derived from customershave positive, consistent experiences each time they comelocated incontact with our clients' businesses by using smart, customer-centric strategies leveraged by the appropriate combination of technologies and techniques.
Our strategic intentCanada, including Enbridge Services, which isto strive for leadership in the rapidly growing Customer Care market through speed in anticipating and responding to evolving client needs, with the highest quality services available, as well as openness to new ideas and solutions. Our internal resources include business and technological experience, expertise, market position and continuous building of competencies.
Our Market Opportunity
The convergence of E-commerce and Customer Relationship Management (CRM) is driving the growth of the Customer Care solutions market
IDC has estimated that the market for Internet professional services will be $78.6 billion by 2003. These numbers indicate that the Internet is becoming the preferred means of business-to-business and business-to-customer commerce. The growing number of on-line users and e-commerce applications continue to drive usage growth, merging e-commerce and CRM, the two dominant trends in Customer Care.
Market growth in the Customer Care industry is being driven by services and technology innovation combined with the increased penetration of Internet, wireless and mobile technology and front-office applications. The market for Customer Care professional services is also being driven by the fast speed of technology improvement, which shortens solution lifecycles.
Segmentation becoming increasingly important
Customer Care is an integral function of business. It deals withone ofthe most fundamental business needscaring for customers. At the same time, with the segmentation of various markets
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and industries, companies are demanding solutions that suit their different customer demographics and psychographics. These two factors have contributed to fast growth in the Customer Care solutions market.
The rapid shift to customization and one-to-one relationships with customers has required a new approach to developing and deploying Customer Care solutions. Understanding segmentation is a prerequisite for success.
Today, nearly every company is a potential Customer Care solutions client. The needs and objectives of companies vary widely. As the market has become increasingly segmented, the ability to master various markets, such as Customer Care, has become crucially important.
our larger accounts. Ina segmented business market with high competition, critical success factors include a comprehensive service portfolio, a strong and appealing brand image and an ability to respond to specific client/ customer demands rapidly. We will continue to focus in these critical areas with the aim of sustained leadership and continuous brand improvement.
Offering companies cost-effective, scalable solutions
Clients are demanding complete multi-channel, blended media solutions that help them bring the various points of customer interactions together to eliminate dysfunctional technology "silos." Conventional call center and field interactions with customers are shifting to the Web. We offer our clients rapid, dependable and scalable e-commerce solutions.
Shift from company-centric to customer-centric enterprise model
As companies recognize the need for improved customer care in the increasingly competitive new economy, the enterprise model is shifting away from the old, company-centric model to a new, customer-centric model.
The emergence of the Internet prompted a fundamental shift from back-office applications to front-office applications. Just as technology has revolutionized the way companies operate internally (back-office) it is now being utilized to revolutionize customer-facing (front-office) operations.
Historically, companies have organized their business processes to ensure efficient Enterprise Resource Planning. With this model, front-office functions that interact with the customer are disconnected. Because such a company is not operating with a unified, single face to the customer, an unsatisfactory customer experience may result. Our Customer Care services help companies put their customers at the center of their business processes. The focus2000, less than 1% of ourbusiness model is on achieving long-term customer retention rather than short-term operational efficiencies.
E-business is shaping both contentrevenues were derived from Enbridge, andtechnologies
The acquisition of Camworks, an e-business solutions provider,we received no other revenue from customers outside the United States. Any long-lived assets located inlate 1999 allowed us to approach clients with new service offerings. With the addition, we enhanced our ability to offer Web-based applications to clients. Based in St. Paul, Camworks specialized in robust, e-commerce solutions. In combination with our existing skills, the acquisition will add to our abilities to design and deploy e-business solutions for business, including extranets, intranets and the Internet.
Our solutions
We offer a broad portfolio of competencies for a "complete" solution approach. We believe that integration and information sharing between various technology solutions in the enterprise will play a critical role as companies strive to provide their customers with a consistently valuable experience across all points of customer contact including their Web sites, contact centers and field representatives. Our
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solution-building process is directly related to the specific needs and objectives of our clients. The typical lifecycle of our client engagements includes four primary phases: strategy, initiative planning, development/deployment and support. Our competencies include Customer Care Strategy, Customer Intelligence, E-Business, Contact Centers, Wireless and Mobile Technology, Front-Office Applications, Branding, Performance Improvement, and Support Services.
The ZAMBA Methodology
Through strategy, initiative planning, development/deployment and support, our Z-Step methodology is the common thread that binds all of the competencies and provides clients with a proven approach for building solutions. The ZAMBA methodology is highly iterative to enable rapid solutions with minimized risks and maximized rewards.
A common set of deliverables is provided to clients during the separate phases of the engagement lifecycle to provide clients with delivery consistency and maintain integration across all competencies. These deliverables include six primary documents for all ZAMBA engagements: Customer Care Discovery, Customer Care Strategy, Customer Care Blueprint, Customer Care Implementation, Customer Care Realization and Customer Care Solution.
In the end, solutions are rapidly delivered to clients with the scalable ZAMBA Agile Architectures that are built to accommodate future development and upgrades.
Customer Care Strategy
Our Customer Care Strategy competency offers a range of solutions to meet the needs of a variety of customers from numerous industries. The ZAMBA Customer Care Strategy document provides a customer-centric guideforeign countries were immaterial for thesolution-building process. On projects with multiple phases, the Customer Care Strategy serves as a guide for future development.past three fiscal years.Industry Background
Customer Intelligence
Our Customer Intelligence services helps clients collect data about their customers, extract relevant information,Customer-centric business strategies are used by businesses andturn the information into a knowledge-based product that they can usegovernmental organizations to enhance theirsales, marketingcustomers’ access to andservice approaches.
E-Business
Our e-business competency offers a full rangeexperience with their enterprise through multiple channels ofservices with an e-commerce emphasis to strategize, plan, design and develop successful e-businesses,communication, includingInternet strategy, Web design and development, branding, e-sales, e-services, on-line community (portal) buildingand e-CRM. Our e-business services overlap and leverage with all of our other services.
Contact Centers
Customer interactions are designed and managed to exchange information and extract knowledge to be leveraged for sales, marketing and service efforts. Inthe Internet,economy, the roletelephone, and direct sales. In addition, organizations implement Customer-centric business strategies to increase their knowledge ofcontact centers has increased, not diminished. Our Contact Center competency has traditionally focused on the development, deploymenttheir customers’ preferences andmanagement of call centers.needs.The
convergence of contact points has shifted the competency to focus on blended media solutions for successful integration and automation of all customer interactions including screen pops, voice response, computer telephony, e-mail, fax and the Web. The Contact Center competency is closely connected to all of our other competencies, and our Customer Intelligence competency in particular.
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Wireless and Mobile Technology
Our wireless and mobile technology competency helps companies provide rapid call status, electronic messaging, increase productivity, increase timeliness and quality from data from field, and reduced dependence on contact centers with wireless networks and mobile devices. Wireless networks include terrestrial Wide Area Networks ("WANs"), satellite WANs and other networks such as paging, microwave and spread spectrum. Mobile devices include laptops, palm devices and phones.
Front-office Applications
The Front-office Applications competency is at the core of our business, and will likely continue as the primary source of revenues for the company as the other competencies continue to grow. We provide our clients with front-office application strategy, initiative planning, development, deployment and support. The market for integration of front-office applications continues to grow rapidly. For every dollar spent of software, we believe that an additional $1 to $4 dollars are spent on consulting and systems integration services. The ZAMBA Z-Step front-office application implementation methodology is a proven, iterative approach to minimize risks and maximize returns. We work with technology from many of the industry-leading software developers.
Branding
Our Branding competency specializes in defining customers to create a customer-centric perspective to drive the solution-building process. There is a close connection between branding, customer care strategy and customer intelligence. The branding process begins with the development of a Customer First Creative Blueprint in association with the Customer Care Strategy document. The creative blueprint drives the development of requirements, functionality, design properties and ultimately the identity.
Performance Improvement
Our Performance Improvement competency specializes in training and change management. Performance improvement is a systematic approach to improve the productivity and competence within companies to achieve peak performance associated with a solution or set of solutions. This competency helps companies develop a strategy for successful organizational change, then develop solutions that will improve employee performance and interactions with customers. The process begins by defining our client's needs, and the resulting needs definition guides the development of performance improvement solutions. For training, instruction may include Web-based delivery, computer-based delivery, instructor-led classes and/or print-based self-study materials. For change management, we provide a strategic communications plan, electronic performance support system, rewards and recognition programs, employee feedback systems and more. Our Performance Improvement competency is closely associated with the support phase of the ZAMBA Z-step methodology.
Support Services
Our Support Services competency provides a range of services to clients. At year-end we were providing ongoing support for the customer care systems of several notable clients, including Compaq, CompuCom, Enbridge Home Services, Progressive Insurance, Alliant and General Electric. The services we provide include standard maintenance, upgrades, bug fixes, warranty support, technical support, and resolution of systems failures. Many new outsourcing models have emerged recently, such as the Application Service Provider model, and are expanding the scope of support services.
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Our Customers
We continue to work with an impressive list of leading blue chip companies. These companies hire ZAMBA Solutions for its results-oriented approach, reputation, andability todeliver on-time, on-budget solutions. Proven experience, expertise, passion, agilityprofitably attract, retain, service andfocus set ZAMBA Solutions apart.
ZAMBA hasexpand customer relationships is critical to success in today’s highly competitive market. As companies implement tools and best practices to enhance their customer management abilities, they are realizing the importance of providing consistent, high quality customer experiences. Because customers will no longer accept different treatments through different channels, companies must have an effective multi-channel approach for customer interactions. However, integrating multiple channels with existing enterprise systems requires an enterprise-wide strategic vision, business process management skills and technology expertise. To meet this challenge, organizations are seeking assistance from third party service providers. However, in the past twelve to3
eighteen months, there has been a pronounced decline in customer spending for information technology consulting services. There is no assurance that expenditures for information technology consulting services will return to their former levels.
Clients
We primarily target large and
maymid-size corporations. We have proven our expertise by implementing solutions for over 300 clients since 1998. Best Buy, Blue Cross Blue Shield, Enbridge Services and Union Bank of California, each accounted for over 10% of our revenues in 2002. Best Buy, Nortel Networks, and Enbridge Services, each accounted for over 10% of our revenues in 2001. Best Buy was thefuture, derive a significant portion of its revenue from a relatively small number of clients. In 1999, noonly customerrepresentedwho accounted for more than 10% ofZAMBA's revenue.our revenues in 2000.
Sample Clients:
3Com, Allina Health System, American Express, Ameritech, AvidRelationships With Leading TechnologyBay Networks, BellSouth, Best Buy, Borland, Caterpillar, Calico, Cisco, Colorado Springs Utilities, CompuCom, Compaq, Consumers First, Convergys, Decision One, Diebold, Digital, Duty Free Shops, Eaton, GE Capital, GE Medical, GE Power, General Mills, Health Risk Management, Hertz, Hitachi, Data Systems, Honeywell, Houston Industries, Hewlett Packard, IBM, Inktomi, Intermedia, Intuit, Inprise, Lodgenet, Macromedia, MCI, Mervyn's, Network EquipmentProvidersIn order to deliver best-in-class solutions, we have established alliances with some of the world’s leading software companies and technology providers. Some of the companies that we have worked with in the past year include Amdocs, Art Technology
Norstan, Nortel, OEC Medical, Palm Computing, Public Service Electric & Gas, Qualcomm, Rockwell, Roche Diagnostics, Silicon Graphics, Southern California Edison, Sprint PCS, Sybase, Symbol, Thermawave, Think3, United HealthCare, US Bank, US West, Vantive, Warner Brothers Music, and Xerox.
Relationships with leading technology providers
ZAMBA Solutions has a broad range of integration capabilities and relationships with leading technology providers including Allaire,Group, Aspect Communications,Clarify, Calico, Cybercash, Edify,Genesys,Telecommunications, IBM, IETIntelligence Electronics,Informatica, Interwoven, Microsoft,NewChannel, Net Perceptions, Oracle, Primus, Rubric,PeopleSoft, and SiebelSun, Sybase, Vignette,Systems. We also have a relationship with HCL Technologies (“HCL”), a technology consulting company based in India, under which we have used HCL’s lower-cost offshore consultants to provide services to our clients. This relationship grew out of a prior strategic alliance with HCL that we entered into during the first quarter of 2002. We mutually agreed with HCL to terminate our strategic alliance during the fourth quarter of 2002.At the present time, we do not have material contracts with any of these companies. However, some of these relationships are important to us for the referrals they may provide. Currently, our most significant alliances in terms of revenue opportunities are with Amdocs, Aspect, Microsoft and
Workscape.PeopleSoft. In many instances, these companies sell their software packages to customers, and we then provide customization and systems integration. In other cases, our clients request that we assist in determining the most appropriate software and technology packages to meet their needs.Ownership in NextNet Wireless, Inc.
We own a material share of NextNet Wireless, Inc. (“NextNet”), a private corporation that develops non-line-of-sight broadband wireless access platforms that provide telecommunications carriers with solutions for rapid deployment of high-speed, two-way voice and data services over the “last mile” of the communications network. Our chairman, Joseph B. Costello, is also the chairman and a shareholder of NextNet. Another one of our directors, Dixon Doll, is also a director and a shareholder of NextNet. Additionally, another director of Zamba, Sven Wehrwein, is a consultant for NextNet. We originally recorded our NextNet holdings at $0 because it was uncertain whether we would ever realize any value from our holdings.
As described in Note 11 to the consolidated financial statements included in this Annual Report on Form 10-K, we received approximately $5.22 million from various parties for selling a portion of our NextNet stock holdings during 2002. Our ownership of NextNet was approximately 1.3 million shares of Series A Preferred Stock at December 31, 2002 and 2.4 million shares of Series A Preferred Stock at December 31, 2001. Our ownership of NextNet also decreased by approximately 177,000 shares of Series A Preferred Stock in the first quarter of 2003 from sales to two private investors totaling $750,000. Of our remaining shares, we have placed an aggregate of 583,333 in an escrow account as collateral for our loan from Entrx Corporation. In addition, we issued a warrant to an investor affiliated with a prior purchaser of NextNet shares from us, to purchase 125,000 additional shares of our Series A Preferred Stock in NextNet from us at $6.00 per share, any time prior to the close of business on May 17, 2004.
Competition
The
Customer Care consulting systemsservices integration market is highly competitive and served by numerous global, national, regional and local firms. The market includes participants from a variety of market segments, includingsystemsconsulting and systems integration firms, contract programming companies, application software firmse-business solutions providers, advertising agencies, digital agencies,and their professional services groups,of softwareand teleservice and contact center outsourcers.4
We believe that our primary competitors include:
• Large systems integrators or management consulting firms (e.g., Accenture, IBM, BearingPoint, EDS)
• CRM consulting companies
and "Big Five" consulting firms.(e.g., Akibia, Braun, E-Loyalty, Inforte)
PrimaryIn addition to these external competitors,
in the Customer Care market include practices within eLoyalty, Breakaway Solutions, AnswerThink, Sapient, Scient, USWeb/CKS, agency.com and Cambridge Technology Partners. Wewe also face competition from the professional service organizations of customer care product vendors and the informationservices organizationstechnology departments within potential client companies. Some of our competitors, particularly large systems integrators, may have a pre-existing relationship with many of our potential customers, either through non-customer-centric services that they provide to such customers or, in the case of large management consulting firms, through audit or other non-audit services those management consulting firms provide to our current or potential clients.We differ from nearly all of our competitors by our exclusive focus on customer centric services. Our highly skilled consultants work closely with clients to implement industry best practices through technologies and business processes that drive business value.
In addition to facing a large number of potential competitors, many of our competitors also have certain advantages over us, including:
• better name recognition;
• a broader range of products and services;
• greater sales, marketing, distribution and technical capabilities;
• greater revenues and financial resources; and
• established market positions.
We believe that the principal competitive factors in the systems integration industry include technical expertise, responsiveness to client needs, speed in delivering solutions, quality of service and perceived value. We also believe that our ability to compete depends in part on a number of competitive factors outside our control, including the ability of our competitors to hire, retain, and motivate employees, the price at which other companies offer comparable services, and the extent of our
competitors'competitors’ responsiveness to customer needs.
Many of our direct, indirectWe believe that technological changes, the decreased spending on information technology consulting services by many current and potentialfuture competitors have financial, technical, marketing, sales, distributionclients, andother resources substantially greater than we do. Some of these competitors have established market positions, greater name recognition, substantial technological capabilities and generate greater consulting revenues. We face competition not only from these established companies, but also from start-up companies that haveindustry consolidation or new entrants will continue to cause aniche expertiserapid evolution inspecific application technologies. Thethe competitive environment of the industry. At this time, it is difficult to predict the full scope and nature of this evolution. Increased competition could result in price reductions, reduced margins on technology consulting services, and a further loss of revenue. We cannot assure you that we will be able to compete successfully with existing or new competitors or that competitive pressures will not materially and adversely affect our business, financial condition and results ofoperations, and financial condition.operations.
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OurPeople and Culture
People are the most important ingredient in our success, and we attempt to foster programs to make ZAMBASolutions an enjoyablea fulfilling and rewarding place to work. Our goal of helping clients satisfy their customers’ needs profitably, is achieved through the relationships our people build with our clients. As of December 31,1999, ZAMBA Solutions2002, we had185 full-time63 employees, mainly throughout North America. Of that total,14544 individuals were intheour professional staff,29and 19 were in administrative roles and11business development. During 2002 and 2001, as a result of the restructuring of our business, we reduced the number of our employees significantly through involuntary workforce reductions. Additional information concerning our restructuring inbusiness development.
Our core values areagility, passion2002 andfun, growth, honesty, results, innovation, diversity,andteamwork. Our values set our direction and stimulate our growth. At the heart2001 is contained in Item 7 ofeverything we do, they guide our management team and employees, helping us stay focused: to deliver innovative, cutting-edge Customer Care solutions supported by proven expertise and experience. We share these values with our customers, partners and investors. We expect them to hold us to these values and call us on them.this report.
Our employees are not parties to any collective bargaining agreements, and we believe that relations with our employees are good.
Proprietary Rights
ZAMBA'sOur success is dependent upon our software deployment and consulting methodologies and other intellectual property rights. The value that we provide to our clients is more dependent on our ability to help our clients identify strategic business benefits and to provide project management and delivery skills than it
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is on any particular piece of technology that we have developed. We rely upon a combination of trade secret, nondisclosure and other contractual arrangements and technical measures
and copyright and trademark laws,to protect our proprietary rights.ZAMBAWe generallyentersenter into confidentiality agreements with employees, consultants, clients and potential clients andlimitslimit access to, and distribution of,itsour propriety information. There can be no assurance thatthe steps taken by the Company in this regardour actions will be adequate to deter misappropriation ofitsour propriety information or thatthe Companywe will be able to detect unauthorized use and take appropriate steps to enforceitsour intellectual property rights.
The Company's business includes the developmentOne component of our services is to develop custom software applications in connection with specific client engagements. Ownership of such software is generally assigned to
the client.our clients. In addition,the Companywe alsodevelopsdevelop object-oriented software components that can be reused in software application development and certain foundation and application software products, or software"tools,"tools, most of which remainthe property of the Company.our property.
Although
the Company believeswe believe thatitsour services and products do not infringe on the intellectual property rights of others, there can be no assurance that such a claim will not be asserted againstthe Companyus in the future.
Year 2000 Update
PriorWeb Site Access toJanuary 2000, we evaluatedSEC FilingsOur Web site address is www.zambasolutions.com. We make our
businessAnnual Report on Form 10-K, Quarterly Reports on Form 10-Q, andoperational systemsCurrent Reports on Form 8-K and all amendments toensure readiness for the year 2000. As a result, we believe that all mission critical software and hardware was assessed, and if necessary, remedied to be ready for the year 2000. All mission critical hardware and software has continued to function beyond January 1, 2000 without interruption.
As the year 2000 progresses, however, we may experience problems associatedthose reports available free of charge on our Web site as soon as reasonably practicable after such material is electronically filed with theyear 2000 that have not yet been discovered. We are continuing to monitor both our internal systems and transactions with customers and suppliers for any indications of year 2000 related problems. As of February 17, 2000, we had incurred external costs of approximately $30,000 related to Year 2000 readiness, including testing, analysis, and purchase of hardware and software upgrades. We believe this to be the overall cost of our Year 2000 readiness project; however, there can be no assurance that final costs will not exceed this level.SEC.Item 2.
PropertiesProperties.
The Company'sOur headquarters facility consists of approximately
10,45110,000 square feet located ina multi-story building in suburbanMinneapolis, Minnesota. The facility is leased pursuant to an agreement that expires
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in
August 2000. The CompanyDecember 2005. We alsomaintains officesmaintain approximately 1,000 square feet of executive office space under short-term leases in San Jose, California and Toronto, Canada.During 2002, we completed the significant reduction of our office space begun in 2001. We reduced the size of our headquarters facility, which had been approximately 27,000 square feet, by returning approximately 17,000 to our landlord. We also terminated leases
spaceforoperationsapproximately 75,000 square feet in Campbell andsales functions inPleasanton, California; Colorado Springs and Parker, Colorado; Boston, Massachusetts; St. Paul, Minnesota,CupertinoandPleasanton, California,Toronto, Ontario. We also transferred a facility in Chennai, India to HCL Technologies. Had they run to full term, the leases for the North American facilities that we terminated would have expired at various times through June 2007. With the exception of the lease for the Parker, Colorado, facility, which terminated at the end of September 2002, we negotiated buyouts of all of the leases for these facilities during 2002.We accrued various charges related to our lease terminations, including the following amounts in the quarter indicated: $1.17 million in the second quarter of 2001, $175,000 in the fourth quarter of 2001, $1.34 million in the first quarter of 2002, and
Boston, Massachusetts. The Company plans$1.19 million in the second quarter of 2002. As a result, future obligations for our office leases have decreased toexpand its currentapproximately $1.85 million as of December 31, 2002, including $850,000 owed for lease termination settlements to be paid in 2003. This is a decrease of approximately $11.06 million or 86% from the approximately $12.91 million of future facility obligations that we were responsible for as of December 31, 2001.Further information regarding our lease termination agreements for facilities
and to move into new facilities to meet its anticipated level of operations. For additional information concerning the Company's lease obligations, seeis contained in Note37 to theCompany'sconsolidated financial statements included in this Annual Report on Form 10-K.Additional information about our remaining lease obligations are set forth in Note 4 to the consolidated financial statements included in this Annual Report on Form 10-K.
Item 3. Legal
ProceedingsProceedings.
We are subject to various legal proceedings and claims that arise in the ordinary course of business. The following is a summary of our current legal proceedings.
6
On August 5, 2002, our former president and CEO, Doug Holden, notified us that he believes we breached his severance agreement with us following the separation of his employment. Mr. Holden has requested continued payroll and benefits and continued vesting of stock options for six months from June 27, 2002, the date of his separation. Mr. Holden’s annual salary at the time of his separation was $240,000. Mr. Holden has offered to resolve this matter for $120,000, plus the value of his benefits and continued vesting of his options. We believe that we have valid defenses to Mr. Holden’s claims and/or that Mr. Holden is not
currently involvedentitled to the items he is requesting. The timing and ultimate resolution of Mr. Holden’s claims are uncertain at this time.We are also subject to other various legal proceedings and claims that we do not believe are material either separately or in
anythe aggregate.In addition to these matters, we settled other actual or threatened legal proceedings during 2002. These settlements were discussed in our quarterly reports on Form 10-Q for the quarters ended June 30 and September 30, 2002. The settlements discussed in the September 30 quarterly report include the items described below.
On March 13, 2003, we reached an agreement with Key Equipment Finance, to terminate our lease for office furniture and settle related litigation. Under the agreement, we will pay a total of $145,000 in various installment payments from the settlement date through December 2003. Key had previously filed a complaint against us in Hennepin County District Court in Minneapolis, Minnesota alleging that we had breached leases for office furniture. This action was dismissed with prejudice upon settlement.
On October 10, 2002, we reached an agreement with Army Corps Operating Associates (“Army Corps”), to terminate our lease for a facility in St. Paul, Minnesota, and settle related litigation. Under the termination and release for this facility, we will pay a total of $500,000 in various installment payments from October 2002 through September 2003. As of March 15, 2003, we have paid $225,000 of the settlement amount.
On October 10, 2002, we reached an agreement with WTA Campbell Technology Park LLC (“WTA”), to terminate our lease for a facility in Campbell, California, and settle related litigation. Under the termination and release for this facility, we will pay a total of $729,300 in various installment payments from October 2002 through August 2003. As of March 15, 2003, we have paid $411,000 of the settlement amount.
On September 27, 2002, we entered into a settlement agreement with a furniture lessor, Fidelity Equipment Leasing, that had threatened to bring an action against us for an alleged breach of five equipment leases. We agreed to pay a total of $120,000 from September 2002 through April 2003 in exchange for termination of the lease and a release of Fidelity’s claims. As of March 15, 2003, we have paid $105,000 of the settlement amount.
Item 4. Submission of Matters to a Vote of Security
HoldersHolders.
ThereNo matters were
no matterssubmitted to a vote ofthe security holders inour stockholders during the fourth quarter of1999.2002.7
8
Item 5. Market For
Registrant'sRegistrant’s Common Equity and Related Stockholder Matters.
The Company's Common StockWe were incorporated in Delaware in 1990 under the name Racotek, Inc. Our common stock began trading on December 10, 1993, on the Nasdaq National Market under the symbol
"RACO,"“RACO,” in connection withitsour initial public offering.OnWe changed our corporate name to Zamba Corporation on October 5, 1998,the Company changed its corporate name to ZAMBA Corporation. As a result ofand, in conjunction with this name change, our common stock began trading under theCompany's Common Stocksymbol “ZMBA.” As of July 1, 2002, our stock began trading on theNasdaq National Market under the symbol "ZMBA."Over-The-Counter Bulletin Board (“OTC BB”).
A summary of the range of high and low closing prices for
the Company's Common Stockour common stock for each quarterly period in the two most recent fiscal years, is presented below. These prices reflectinterdealerinter-dealer prices and do not include retail markups, markdowns or commissions.
HighLow1998First Quarter$4.06$1.31Second Quarter4.062.63Third Quarter3.191.56Fourth Quarter3.191.501999First Quarter$3.75$2.00Second Quarter2.971.56Third Quarter2.561.50Fourth Quarter18.941.88
The Company has
High
Low
2001
First Quarter
$
4.00
$
1.61
Second Quarter
1.99
0.77
Third Quarter
1.20
0.42
Fourth Quarter
0.62
0.34
2002
First Quarter
$
0.70
$
0.29
Second Quarter
0.63
0.17
Third Quarter
0.34
0.06
Fourth Quarter
0.25
0.06
We have never paid cash dividends on
its capitalour common stock anddoesdo not anticipate declaring or paying any cash dividends in the foreseeable future.The Company intendsWe intend to retain future earnings, if any, for the development ofitsour business.
On March 21, 2003, the last reported sale price of our common stock on the OTC BB was $0.20. As of
February 28, 2000, the CompanyMarch 21, 2003, we had approximately4,0005,600 stockholders of record.
9
Item 6. Selected Financial Data.
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
(for the years ended December 31)(In(In thousands, except per share data)
2002
2001
2000
1999
1998
Revenues:
Professional services
$
10,184
$
33,302
$
41,740
$
29,030
$
9,373
Reimbursable expenses
915
3,486
4,426
2,489
592
Total revenues
11,099
36,788
46,166
31,519
9,965
Costs and expenses:
Project and personnel costs
9,366
20,036
20,549
15,225
4,513
Reimbursable expenses
915
3,486
4,426
2,489
592
Sales and marketing
1,750
5,824
5,791
2,695
2,187
General and adminsistrative
7,291
14,503
14,624
9,435
3,638
Restructuring charges and non-recurring items
3,321
2,188
753
—
—
Research and development
—
—
—
—
1,069
Amortization of intangibles
—
231
2,881
3,771
936
Loss from operations
(11,544
)
(9,480
)
(2,858
)
(2,096
)
(2,970
)
Other income (expense), net
4,931
(49
)
182
(10
)
188
Net loss
$
(6,613
)
$
(9,529
)
$
(2,676
)
$
(2,106
)
$
(2,782
)
Net loss per share - basic and diluted
$
(0.17
)
$
(0.28
)
$
(0.08
)
$
(0.07
)
$
(0.10
)
Weighted average common shares outstanding - basic and diluted
38,419
33,568
31,572
30,628
26,792
8
19991998199719961995Net revenues:Services$27,993$8,992$5,487$5,293$2,875Products2833668761,9063,298Total revenues28,2769,3586,3637,1996,173Cost and expenses:Project costs14,2624,4404,5463,6951,385Product costs199471,2662,0273,001Other costs3,00073012Sales and marketing2,6762,1864,2376,2589,045General and administrative6,0402,8632,7092,0912,265Research and development1,0693,2864,2154,170Non-cash compensation32560Amortization of intangible assets3,771936Loss from operations(1,997)(2,973)(9,693)(11,087)(13,693)Other income (expense), net(10)1884228551,335Net loss(2,007)$(2,785)$(9,271)$(10,232)$(12,358)Net loss per sharebasic and diluted$(0.07)$(0.10)$(0.36)$(0.40)$(0.50)Weighted average common shares outstandingbasic and diluted30,54826,71225,93225,37224,765CONSOLIDATED BALANCE SHEET DATA
(as of December 31)(In thousands)
2002
2001
2000
1999
1998
Cash, cash equivalents and short - term investments
$
549
$
1,326
$
4,843
$
7,973
$
3,054
Working capital (deficit)
(2,635
)
(45
)
7,143
6,707
4,173
Total assets
2,821
7,668
16,513
16,511
14,383
Long-term debt, less current
164
194
469
816
1,333
Total stockholders’ equity (deficit)
(2,330
)
2,088
9,062
10,251
11,196
Quarterly Financial Information (Unaudited)
(In thousands, except per share data)
March 31,
2001
June 30,
2001
September 30,
2001
December 31,
2001
Revenues
$
13,083
$
9,160
$
8,203
$
6,213
Operating loss
(1,112
)
(5,267
)
(924
)
(2,177
)
Net loss
(1,082
)
(5,286
)
(937
)
(2,224
)
Net loss per share:
Basic
(0.03
)
(0.16
)
(0.03
)
(0.06
)
Diluted
(0.03
)
(0.16
)
(0.03
)
(0.06
)
March 31,
2002
June 30,
2002
September 30,
2002
December 31,
2002
Revenues
$
3,235
$
2,513
$
2,617
$
2,734
Operating loss
(5,279
)
(4,641
)
(1,255
)
(370
)
Net income (loss)
(5,336
)
(2,042
)
(1,038
)
2,173
Net income (loss) per share:
Basic
(0.14
)
(0.05
)
(0.03
)
0.05
Diluted
(0.14
)
(0.05
)
(0.03
)
0.05
9
(In thousands)
19991998199719961995Cash and cash equivalents and short-term investments$7,969$3,054$5,414$11,972$15,074Working capital6,8474,1725,18212,72716,818Total assets16,16414,3717,53316,99527,172Total stockholders' equity10,35011,1956,32315,38325,389
10
Item 7.
Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations.Overview
Overview
ZAMBA Corporation is anationalpremier customer careconsultingservices company.AccordingWe help our clients be more successful in: acquiring, servicing, and retaining their customers. We work with our clients to help them to increase their customers’ access to theGartner Group, customer care is expectedenterprise through the use of multiple channels of communication, including the internet, call-based routing, and sales force automation, and togrow at a cumulative average growth rate of 54% per year through 2002. Our services are designed to assist clients in building lasting relationships with customers,increase theeffectivenessenterprise’s knowledge ofcustomer servicethe preferences andsales operations,needs of its customers. Based on our expertise andimprove overall communication with customers. We deliver our services usingexperience, we have created solutions that we believe address each aspect of aunique combination of accumulated expertise in the customer carecustomer-centric, including strategy, marketing and analytics, content and commerce, contact center, fieldexisting technology, and client knowledge. We perform our services on both a fixed-bid, fixed-timetable and time and material basis. Rapid development and significant client involvement are key aspects to our methodologies. We offer our clients end-to-end assistance with their implementations, including business case evaluation, system planning and design, software implementation, modification and development, training, installation, change management, network management, and post-implementation support. Our services include the design, implementation and integration of enterprise level applications to facilitatesales,automation, call center management, marketing automation and automatedfield service andsales.enterprise integration. We also own approximately35%12% of the equity in NextNet Wireless, Inc., a private corporationengaged inthat develops non-line-of-sight broadband wireless access platforms that provide telecommunications carriers with solutions for rapid deployment of high-speed, two-way voice and data services over thedevelopment“last mile” ofwireless data products targeted at wireless DSL. Thethe communications network. Our chairman,of ZAMBA,Joseph B. Costello, is also the chairman of NextNet Wireless, Inc. Another of our directors, Dixon Doll, is also a director and a shareholder of NextNet Wireless, Inc. Additionally, another director of Zamba, Sven Wehrwein, is a consultant for NextNet.
We currently derive most of our
revenuerevenues from systems integration services, including business case evaluation, system planning and design, software package implementation, custom software development, training, installation and change management.We also derive recurring revenue from providing post-implementation support.
Our revenues and earnings may fluctuate fromquarter to quarterquarter-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 accuracy of estimates of resources required to complete ongoing projects, and general economic conditions and other factors.Also,Consequently, the results of operations described in this report may not be indicative of results to be achieved in future periods. In addition, revenues from a large client may constitute a significant portion of our total revenues in any particular quarter.
Key Financial Transaction
OnWe incurred significant losses and negative cash flows from operations during the year ended December29, 199931, 2002. We also had a negative working capital of $2.64 million and a stockholders’ deficit of $2.33 million at December 31, 2002. To fund operations we raised $9.40 million in funding in 2002 and theCompany completedfirst quarter of 2003. This is discussed in more detail in the Liquidity and Capital Resources section of this report.Restructuring Charges and Non-Recurring Items
We incurred unusual charges in the first and second quarters of 2002 that, in the aggregate, were equivalent to approximately 30% of our 2002 revenue. In the first quarter of 2002, we incurred unusual charges of $1.69 million for facility and employment matters, and in the second quarter of 2002, we incurred unusual charges of $1.64 million for facility and non-cash compensation matters. Included in the first quarter charges was a
merger$1.34 million charge related to the leases for our Campbell, California, and Colorado Springs, Colorado, facilities, and included in the second quarter charges this amount was a $1.19 million charge for facility closings and lease termination costs. The second quarter facility charges included $190,000 for closing our Boston, Massachusetts, facility, $290,000 for reducing the amount of space we occupy in Minneapolis, Minnesota, and $713,000 for increasing the accrual for terminating our St. Paul, Minnesota and Campbell, California facilities to amounts consistent withCamworks, Incorporated,buy-out offers made by our landlords. We subsequently reached termination agreements with our St. Paul and Campbell landlords. Upon completion of the termination payments to our St. Paul and Campbell landlords during the third quarter of 2003, we expect to realize annual savings of approximately $2.8 million related to all of the facility terminations and reductions described above. We also incurred a $350,000 charge during the first quarter of 2002 for severance pay relating to the reduction in headcount, including the separation of three vice presidents, which have resulted in annualized savings of approximately $3.5 million. The second quarter unusual charge also included a $443,000 non-cash compensation charge arising out of the exercise10
by Paul Edelhertz of his right to assign to us an
e-business solutions provider basedaggregate of 250,000 shares of our common stock in exchange for our cancellation of a promissory note issued to us by Mr. Edelhertz bearing a principal balance of $500,000 and accrued interest through the date of cancellation of $43,250. This transaction relates to an agreement dated December 26, 2000, as amended on August 2, 2001. Mr. Edelhertz is a member of our board of directors and was our president and CEO from October 1998 through October 2000 and a vice president from August 1996 through October 1998.We also incurred restructuring and unusual charges in 2001 and 2000. We undertook a restructuring action in the second quarter of 2001, when we recorded a restructuring charge of $2.19 million. We made other headcount reductions in the third and fourth quarters of 2001, and took further cost-reduction measures in the first and second quarters of 2002, as described above. Our restructuring charge in the second quarter of 2001 represented approximately 6% of our revenue for 2001, and was composed of $777,000 for severance payments, $123,000 for other employee-related costs (including continued medical benefits for the terminated employees), $1.173 million for facility closings and other lease termination costs, $87,000 to resolve a contract dispute with a vendor, and $28,000 of other related restructuring charges. No non-cash write-offs were incurred in connection with the restructuring charge. The facilities portion of the restructuring charge in the second quarter of 2001 includes new and additional lease termination costs and other expenses associated with our decisions to consolidate our operations and close unproductive or duplicative office locations in St. Paul,
Minnesota.Minnesota and Pleasanton and Carlsbad, California.Non-recurring charges of $753,000 were recorded in 2000. This represents approximately 2% of the revenue for 2000. The
acquisition extends ZAMBA's positionitems consist of severance expenses for senior management departures, costs associated with closing our St. Paul office in order to consolidate into an expanded, common Minneapolis facility, and the termination of a long-term software support contract.Restructuring activities through December 31, 2002, were as follows:
Facility Closings
and Lease
Termination Costs
Severance and
Other Employee
Related Costs
Other
Total
Fourth Quarter 2000 Provision
$
240,000
$
307,000
$
206,000
$
753,000
2000 Utilized
—
(137,000
)
(206,000
)
(343,000
)
Balance as of December 31, 2000
240,000
170,000
—
410,000
Second Quarter 2001 Provision
1,173,000
900,000
115,000
2,188,000
Additional facility related accruals in the fourth quarter of 2001
175,000
—
—
175,000
2001 Utilized
(786,000
)
(1,070,000
)
(115,000
)
(1,971,000
)
Balance as of December 31, 2001
802,000
—
—
802,000
First Quarter 2002 Provision
1,335,000
350,000
—
1,685,000
Second Quarter 2002 Provision
1,193,000
—
443,000
1,636,000
Additional severance related accruals in the second quarter of 2002
—
100,000
—
100,000
2002 Utilized
(1,804,000
)
(315,000
)
(443,000
)
(2,562,000
)
Balance as of December 31, 2002
$
1,526,000
$
135,000
$
—
$
1,661,000
We expect to pay approximately $1.49 million of the balance from these restructuring activities in 2003, $85,000 in 2004 and $85,000 in 2005.
11
Results of Operations
Year Ended December 31, 2002, Compared to Year Ended December 31, 2001
Revenues
Revenues decreased approximately 70% to $11.1 million in 2002 compared to $36.8 million in 2001. Revenues before reimbursement of expenses decreased approximately 69% to $10.2 million in 2002 compared to $33.3 million in 2001. This decrease was due principally to the continued significant reduction in the
rapidly growing, Web-based Customer Care market.demand for information technology consulting services, which is the result of a general slowdown in the economy. Many companies have either delayed decisions on information technology consulting projects, or cancelled the projects altogether, resulting in an industry-wide decrease in services revenue. We are also experiencing strong downward pricing pressures, which is adversely impacting our revenue.Project and Personnel Costs
Project costs consist primarily of payroll and payroll related expenses for personnel dedicated to client assignments and is directly associated, and varies with, the level of client services being delivered. These costs represent the most significant expense we incur in providing our services. Project costs were $9.4 million, or 84% of net revenues, in 2002, compared to $20.0 million, or 54% of net revenues, in 2001. The
dealdecrease in project costs between these periods wasvalueddue primarily to the decrease in our headcount from 122 billable consultants as of December 31, 2001, to 44 billable consultants as of December 31, 2002. However, these costs represented an increased percentage of our overall revenue in 2002, because our revenue decreased at a greater rate than we reduced project and personnel costs. Additionally, we are experiencing strong downward pricing pressures, which is not only adversely impacting our revenue as described above, but also our gross margins.Reimbursable Expenses
Reimbursable expenses consist of out-of-pocket expenses incurred while providing services that are reimbursed by our clients. Pursuant to Financial Accounting Standards Board Staff Announcement (Topic No. D-103), which was effective for reporting periods beginning after December 15, 2001, reimbursable expenses are separate line items in both revenue and cost of revenue. Prior to implementation of this Announcement, we had accounted for reimbursable expenses by offsetting the amounts we were paid against project and personnel costs. Reimbursable expenses decreased approximately
$1574% to $915,000 in 2002 compared to $3.5 million in 2001. The decrease is due to the overall decline in revenue and services performed during the same time period.Sales and Marketing
Sales and marketing costs consist primarily of salaries, employee benefits, travel expenses of selling and marketing personnel and promotional costs. Sales and marketing expenses were $1.8 million, or 16% of net revenues in 2002, compared to $5.8 million, or 16% of net revenues, in 2001. The decrease in dollar terms between these periods was due to a reduction in the number of sales and marketing personnel, as well as lower commission expenses resulting from the decrease in revenue.
General and Administrative
General and administrative costs consist primarily of expenses associated with our management, information technology, training and recruiting, facility costs, and finance, legal, human resources and administrative groups. General and administrative expenses were $7.3 million, or 66% of net revenues, in 2002, compared to $14.5 million, or 39% of net revenues, in 2001. The increase as a percentage of revenue was primarily due to revenue being much lower than anticipated in 2002, along with not being able to reduce our fixed costs accordingly. The decrease in the dollar amount was due to our many cost savings initiatives. Salaries and related payroll taxes and benefits decreased by $2.56 million in 2002 as compared
12
to 2001 due to a decrease in the number of general and administrative personnel from 28 at December 31, 2001, to 15 at December 31, 2002. Outside services costs decreased by $740,000 in 2002 as compared to 2001, mainly due to recruiting fees paid for new hires in 2001. Phone and network charges decreased by $640,000 in 2002 as compared to 2001, mainly due to rate negotiations and office closures. Office rent decreased $630,000 in 2002 as compared to 2001 due to lease buyouts in 2002. Bad-debt expense decreased by $400,000 in 2002 as compared to 2001, mainly due to having no large bad-debt write-offs in 2002. Travel and entertainment costs decreased by $380,000 in 2002 as compared to 2001, mainly because we had fewer employees and undertook cost-savings initiatives. Equipment rent decreased by $310,000 in 2002 as compared to 2001 due to buyouts of some of our equipment leases during 2002.
Amortization of Intangibles
Amortization of intangibles was $0 in 2002 compared to $231,000 in 2001. The amortization is due to the acquisition of The QuickSilver Group (“QuickSilver”) in September 1998. The Quicksilver acquisition was accounted for using the purchase method of accounting, and the purchase price was allocated to tangible and identifiable intangible assets. The fair value of identifiable intangible assets was $7.7 million and was
accounted for as a pooling-of-interests.allocated to the following categories: people and experiences, client references, client lists, and intellectual property and delivery methodology. These amounts were amortized over economic useful lives of between two and four years. All of thefinancial information is restated on a combined basis for all periods presented. For additional information concerning the Company's merger with Camworks, see Note 4costs related to theCompany'sQuickSilver acquisition were fully amortized as of December 31, 2001.Gain on Sale of NextNet Shares
We realized a gain on the sale of a portion of our investment in NextNet of $5.22 million in 2002. We did not sell any of our NextNet shares in 2001. Our 2002 gain represents the proceeds from sales of approximately 1.1 million shares of our Series A Preferred Stock in NextNet to various parties, which are more fully described in Note 11 to the consolidated financial statements included in this Annual Report on Form 10-K.
ResultsInterest IncomeInterest income was $12,000 in 2002 compared to $139,000 in 2001. The decrease is interest income is primarily due to our having significantly smaller balances of
Operationscash and investments during 2002 in comparison to 2001.Interest Expense
Results for all periods include the historical results of Camworks acquired by ZAMBA on December 29, 1999,Interest expense in 2002 was $280,000 compared to $188,000 in 2001. The increase in interest expense is due to our increased borrowing needs in 2002, increased interest rates under our accounts receivable funding agreement, which was signed in July 2002, and the
effectpredecessor line of credit facility, and higher amortization of issuance costs related to theissuanceaccounts receivable funding agreement and the credit facility.Income Taxes
We have incurred net operating losses since inception. We are uncertain about whether we will have taxable earnings in the future, and we have not reflected any benefit of
sharessuch net operating loss carryforwards in the accompanying consolidated financial statements.As of
ZAMBA common stockDecember 31, 2002, we had approximately $87 million of net operating loss carryforwards for both financial statement and federal income tax purposes that will begin to expire inthis transaction which was accounted for by2005. The use of these carryforwards in any one year is limited under Internal Revenue Code Section 382 because of significant ownership changes. In addition, thepooling-of-interests method.net operating loss carryforward of QuickSilver is limited under the federal consolidated tax return rules.13
Year Ended December 31,
1999,2001, Compared to Year Ended December 31,19982000Net Revenues
Net revenues increased 202%Revenues decreased approximately 20% to
$28.3$36.8 million in19992001 compared to$9.4$46.2 million in1998,2000. Revenues before reimbursement of expenses decreased approximately 20% to $33.3 million in 2001 compared to $41.7 million in 2000. This decrease was due principally toincreases in boththeaverage size and number of client projects, the acquisition of QuickSilver in September 1998, and the growthcontinued significant reduction in thecombined business sincedemand for information technology consulting services, which is theacquisition. The
11
increaseresult of the general slowdown inservice revenue is primarily due to our transition tothesale of system integration services,economy. Many companies have either delayed decisions on information technology consulting projects, or cancelled theQuickSilver acquisition, and increased market acceptance of our services. Theprojects altogether, resulting in an industry-wide decrease inproduct revenue is due toservices revenue. We are also experienced strong downward pricing pressures, which adversely impacted ourtransition away from selling stand-alone software products. We expect services revenues to increase throughout 2000 while product revenues should continue to decline.revenue.Project and Personnel Costs
Project costs
consistsconsist primarily of payroll and payroll related expenses for personnel dedicated to client assignments and is directly associated with, and varies with, the level of client services being delivered. These costs represent the most significant expensethe Company incurswe incur in providingits services.service. Project costs were$14.3$20.0 million, or51%approximately 54% ofnetrevenues, in19992001, compared to $20.5 million, or approximately 45% of revenues, in 2000. The increase in the percentage of costs compared to revenues was primarily from decreased revenues due to a significant reduction in demand for information technology consulting services in 2001. Further, our revenue decreased at a greater rate than we reduced project and personnel costs, resulting in project costs being an increased percentage of our overall revenues.Reimbursable Expenses
Reimbursable expenses consist of out-of-pocket expenses incurred while providing services that are reimbursed by our clients. Reimbursable expenses decreased approximately 21% to $3.5 in 2001 compared to $4.4 million
or 47% of net revenues,in1998.2000. Theincrease in project costs was primarilydecrease is due toan increasethe overall decline inproject personnel from 77 at December 31, 1998 to 145 at December 31, 1999. Whilerevenue and services performed during theCompany expects to meet its hiring goals in 2000, competition for personnel with information technology skills is intense and the Company expects salaries and wages to continue to increase. The Company periodically reviews and updates its billing rates to cover the expected increase in costs.same time period.
Product Costs
Product costs consist of primarily of software resold to the Company's clients. Product costs were $199,000, or 1% of net revenues, in 1999 compared to $47,000, or 1% of net revenues, in 1998. The decrease in product costs relates primarily to Company's change in business strategy during 1998 and 1999.
Other Costs
Other costs consist of non-billable project personnel costs and other business costs, including training and recruiting costs. Other costs were $3.0 million, or 11% of net revenues, in 1999 compared to $730,000, or 8% of net revenues, in 1998. The increase in other costs relates primarily to the increase in headcount for both training and recruiting personnel.Sales and Marketing
Sales and marketing costs consist primarily of salaries, employee benefits, travel expenses of selling and marketing personnel and promotional costs. Sales and marketing expenses were
$2.7$5.8 million, or10%approximately 16% of net revenues in19992001, compared to$2.2$5.8 million, or23%approximately 13% of net revenues, in1998.2000. Commission costs decreased by $270,000 in 2001 as compared to 2000 due to lower revenue, but this was offset by an increase in salaries paid due to hiring additional sales personnel. Thedollar increases wereincrease as a percentage of revenue was primarily due toinvestments made by the Company in a new brand identity and to higher paid sales personnel. The percentage decrease is due to our increased net revenues and our success in the marketplace. The Company anticipates the dollar amount and percentage of sales and marketing expenses to increase in 2000.lower revenue than anticipated.General and Administrative
General and administrative costs consist primarily of expenses associated with
the Company'sour management, information technology, training and recruiting, facility costs, and finance, legal, human resources and administrativegroups, including occupancy costs.groups. General and administrative expenses were$6.0$14.5 million, or21%approximately 39% of revenues, in 2001, compared to $14.6 million, or 32% of net revenues, in19992000. The increase as a percentage of revenue was primarily due to revenue being much lower than anticipated in 2001. Although our total costs remained relatively consistent, there were many fluctuations in 2001 when compared to 2000. Office rent increased $500,000 in 2001 as compared to 2000 due to new and expanded facility leases in the second half of 2000, primarily in Campbell, California and Minneapolis, Minnesota. Equipment rent increased by $800,000 in 2001 as compared to 2000 due to leasing of furniture, computers and computer equipment, and upgraded phone systems. Much of this equipment was leased in the third and fourth quarters of 2000 and first quarter of 2001 as we were still hiring employees in anticipation of revenue growth. This expense was offset partially by a decrease in depreciation of $180,000 in 2001 as compared to 2000. Depreciation decreased since we are now leasing more equipment instead of purchasing the equipment. Outside services costs increased by $600,000 in 2001 as compared to 2000, mainly due to14
recruiting fees paid for new hires. Travel and entertainment costs decreased by $700,000 in 2001 as compared to 2000, mainly due to cost-savings initiatives. Bad-debt expense decreased by $540,000 in 2001, as compared to 2000, mainly due to three dot-com customer write-offs in 2000.
Amortization of Intangibles
Amortization of intangibles was $231,000 in 2001 compared to $2.9 million
or 31% of net revenues, in 1998. The dollar increase was primarily due to an increase in the number of employees hired during 1999, an increase in occupancy costs related to significant expansion of the Company's office space, and increased investments in other information technology infrastructure. The percentage decrease was primarily a result of improved utilization of office space and administrative functions in comparison to the growth of net revenues. As the Company grows and expands geographically in 2000, it anticipates general and administrative expenses to increase.
12
Research and Development
Research and development expenses were $0, or 0% of net revenues, in 1999 compared to $1.1 million, or 11% of net revenues, in 1998. The dollar and percentage decrease is due primarily to the decrease in research and development personnel which occurred as a result of discontinuing any product development or enhancements of the KeyWare product line in 1998, and the transfer of the NextNet technology in September of 1998 to an entity of the same name. The Company anticipates no research and development expensesin 2000.
Non-cash compensation
Non-cash compensation charges in 1999 consist mainly of expenses associated with Camworks stock granted to Camworks employees' prior to the merger under pre-existing change of control provisions within these employment agreements. These stock grants represented a one-time charge to 1999 earnings of $325,000.TheCompany also granted stock options to non-shareholder employees of Camworks subsequent to the Company's merger with Camworks. The options were granted with an exercise price less than fair market value as a means of incenting the employees to continue employment with Zamba. Deferred compensation related to these options is $1.1 million, which will be recognized over the four year vesting period. The amount of this charge will be approximately $69,000 per quarter for each quarter during the next four years.
Amortization of Intangibles
Intangible assetamortizationexpense in 1999 was $3.8 million compared to $936,000 in 1998. The increaseis due to thefact that we amortized the intangible assets resulting from the September 1998acquisition of The QuickSilverfor a full yearGroup (“QuickSilver”) in1999.September 1998. The Quicksilver acquisition was accounted for using the purchase method ofaccounting. Theaccounting, and the purchase price was allocated to tangible and identifiable intangible assets. The fair value oftheidentifiable intangible assetsacquiredwas $7.7 million and wasrecorded inallocated to the following categories: people and experiences, client references, client lists, and intellectual property and delivery methodology. These amountsare beingwere amortized overtheeconomic useful lives of between two and four years. All of the costs related to the QuickSilver acquisition were fully amortized as of December 31, 2001.Interest Income
Interest income was
$97,000$139,000 in19992001 compared to$229,000$251,000 in1998.2000. The decrease in interest income isprincipallyprimarily due todecreasedour having significantly smaller balances of cash andinvestment balances at the beginning of 1999. Because our cash balance increasedinvestments during1999, The Company anticipates interest income2001 in comparison toincrease in2000.Interest Expense
Interest expense in
19992001 was$107,000$188,000 compared to$59,000$69,000 in1998.2000. The increase in interest expense is due tointerest expense related to the notes payable issuedestablishing, and using a line of credit with Silicon Valley Bank inSeptember 1998 in connection with the acquisition of QuickSilver.2001.Income Taxes
The Company hasWe have incurred net operating losses since inception.
Because of the uncertaintyWe are uncertain about whetherthe Companywe will have taxable earnings in the future,the Company hasand we have not reflected any benefit of such net operating loss carryforwards in the accompanying consolidated financial statements.Critical Accounting Policies
At December 31, 1999,We have identified the
Company has approximately $69.9 millionpolicies below as critical to our business operations and the understanding ofnet operating loss carryforwards for bothour results of operations. The impact and any associated risks to these policies on our business, financialstatementconditions andfor federal income tax purposes that begin to expire in 2005. The useresults of operations are discussed throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations where these policies affect our reported and expected financial results. For a detailed discussion of the application of thesecarryforwards in any one-year is limited under Internal Revenue Code Section 382 becauseand other accounting policies, see Note 1 of
13
significant ownership changes. In addition, the net operating loss carryforward of QuickSilver is limited under the federal consolidated tax return rules.
Year Ended December 31, 1998, Compared to Year Ended December 31, 1997
Net Revenues
Net revenues increased 47% to $9.4 million in 1998 compared to $6.4 million in 1997, due principallyour notes to theCompany's transitionconsolidated financial statements. Our preparation of this Annual Report on Form 10-K requires us to make estimates and assumptions that affect thesalereported amount ofservices insteadassets and liabilities, disclosure ofselling stand-alone software productscontingent assets and liabilities as of the date of our financial statements, and theacquisitionreported amounts ofQuickSilverrevenue and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates.Our critical accounting policies are as follows:
• Revenue Recognition;
• Allowance for Doubtful Accounts; and
• Investment in NextNet Wireless, Inc.
Revenue Recognition. We derive our revenues from systems integration services and post-implementation support agreements. Revenues pursuant to fixed bid contracts are recognized as the services are rendered based on
September 22, 1998. Asthe percentage-of-completion method of accounting (based on the ratio of hours incurred to total estimated hours) in accordance with AICPA Statement of Position 81-1, “Accounting for Performance of Construction-type and Certain Production-type Contracts.” Estimated losses on long-term contracts are recognized in the period in which aresultloss becomes apparent. Revenue15
pursuant to time and material contracts are recognized as the services are performed. Customer support revenues are recognized ratably over the term of the
shift in focus, services revenues increasedunderlying support agreements. We have binding contractual agreements with our customers to$9.0 million in 1998 from $5.5 million in 1997support our revenue.Significant management judgments and
product revenues decreased to $366,000 in 1998 from $876,000 in 1997.
Project Costs
Project costs were $4.4 million, or 47% of net revenues, in 1998 compared to $4.5 million, or 71% of net revenues, in 1997. The dollarestimates must be made andpercentage decrease resulted from the cost reduction efforts in the third quarter of 1997, which significantly reduced the number of employees and related expenses for most of 1998. Although the project costs decreased from 1997 compared to 1998 because of the 1997 cost reduction efforts, due to the acquisition of QuickSilver on September 22, 1998, project personnel headcount increased 156% to 77 at December 31, 1998, from 30 employees at December 31, 1997.
Product Costs
Product costs were $47,000, or 1% of net revenues, in 1998 compared to $1.3 million, or 20% of net revenues, in 1997. The dollar and percentage decrease resulted from the cost reduction efforts in the third quarter of 1997, which significantly reduced the number of employees and related expenses for most of 1998.
Other Costs
Other costs were $730,000, or 8% of net revenues, in 1998 compared to $12,000, or 0% of net revenues, in 1997. The increase in other costs relates primarily to the increase in headcount for both training and recruiting personnel.
Sales and Marketing
Sales and marketing expenses were $2.2 million, or 23% of net revenues, in 1998 compared to $4.2 million, or 67% of net revenues, in 1997. The dollar and percentage decrease resulted from the cost reduction efforts made by the Company in the third quarter of 1997 which significantly reduced the number of employees and related expenses for sales and marketing in 1998.
General and Administrative
General and administrative expenses were $2.9 million, or 31% of net revenues, in 1998 compared to $2.7 million, or 43% of net revenues, in 1997. The percentage decrease resulted from the cost reduction efforts made by the Company in the third quarter of 1997 that significantly reduced the number of administrative employees and related expenses for 1998 relative to the number of professional staff for the same period.
Research and Development
Research and development expenses were $1.1 million, or 11% of net revenues, in 1998 compared to $3.3 million, or 52% of net revenues, in 1997. The dollar and percentage decrease is due primarily to the decrease in research and development personnel which occurred as a result of discontinuing any product
14
development or enhancements of the KeyWare product line in 1998, and the transfer of the NextNet technology in September of 1998 to an entity of the same name.
Amortization of Intangibles
Intangible asset amortization expense in 1998 was $936,000 compared to $0 in 1997. The increase is due to the acquisition of QuickSilver on September 22, 1998. The acquisition was accounted for using the purchase method of accounting. The purchase price was allocated to tangible and identifiable intangible assets. The fair value of the identifiable intangible assets acquired was $7.70 million and was recorded in the following categories: people and experiences, client references, client lists, and intellectual property and delivery methodology. These amounts are being amortized over the economic useful lives of between two and four years.
Interest Income
Interest income was $229,000 in 1998 compared to $427,000 in 1997. The decrease is principally due to decreased cash and investment balances, which wereusedto fund operating activities.
Interest Expense
Interest expense in 1998 was $59,000 compared to $8,000 in 1997. The increase is due to interest expense related to the notes payable issued in September 1998in connection with theacquisitionrevenue recognized on fixed bid contracts in any accounting period. Material differences may result in the amount and timing ofQuickSilver.our revenue for any period if we made different judgments or utilized different estimates. If we do not accurately estimate the resources required or the scope of the work to be performed, or do not manage the projects properly within the planned periods of time or satisfy our obligations under the contracts, then our future consulting margins may be materially affected or losses on existing contracts may need to be recognized. Any such resulting reductions in margins or contract losses could be material to our financial condition and results of operations.Deferred revenue is composed of amounts received or billed in advance of services to be performed. Unbilled receivables represent amounts recognized on services performed in advance of billings in accordance with the terms of the contract.
Allowance for Doubtful Accounts. The preparation of financial statements requires that we make estimates and assumptions that affect the reported amount of assets. Specifically, we must make estimates of the collectability of our accounts receivable. We determine the adequacy of our allowance for doubtful accounts by analyzing historical write-off rates, customer credit-worthiness, current economic trends and changes in our customer payment terms. If we have information that the customer may have an inability to meet its financial obligations (bankruptcy, etc.), we use our judgment, based on the best available facts and circumstances, and record a specific reserve for that customer against amounts due to reduce the receivable to the amount that is expected to be collected. These specific reserves are reevaluated and adjusted as additional information is received. In addition, a general reserve is established for all customers based on a range of percentages applied to the remaining balance. This percentage is based on our historical collection and write-off experience. If circumstances change, our estimates of the recoverability of amounts due to us could be reduced materially. Our accounts receivable balance was $662,000, net of allowance for doubtful accounts of $144,000, as of December 31, 2002.
Holdings in NextNet Wireless, Inc. On September 21, 1998, we transferred our “NextNet” wireless data technology to an entity now known as “NextNet Wireless, Inc.”, and certain of our employees became NextNet employees. In exchange for this technology, we received an equity stake in NextNet Wireless. We originally recorded our NextNet holdings at $0 because it was uncertain whether we would ever realize any value from our holdings.
We have accounted for our NextNet holdings using the equity method of accounting because we have “significant influence” (usually defined as owning 20% or more of the outstanding voting stock, and may also include other factors, such as the level of representation the equity holder has on the Board of Directors of the issuing company) over NextNet’s operations. The equity method requires us to recognize our proportionate share of income and losses from NextNet’s operations, and to make equivalent adjustments to the valuation of our holdings, provided that losses are not to be recognized after the valuation of our holdings are written down to $0. Because the original basis of the investment was $0, and because NextNet has incurred losses since its inception, we have not recognized any of the losses by NextNet. Our NextNet holdings continue to be valued at $0 as of December 31, 2002.
If we did not have “significant influence” over NextNet’s operations, and NextNet did not have a “readily determinable fair value,” then we would account for our NextNet holdings using the cost method of accounting (investment carried at the original cost basis), which would result in the same valuation of $0 as we currently have, because we had expensed all amounts related to NextNet before NextNet Wireless was formed. However, if we did not have “significant influence” over NextNet’s operations, but NextNet did have a “readily determinable fair value,” then we would account for our NextNet holdings at the then fair value. Because our holdings now represent less than 20% of the outstanding voting stock, we will no longer have significant influence over NextNet’s operations. NextNet is not a publicly traded company, so it does not have a readily determinable fair value. Therefore we will continue to value our NextNet
16
holdings at our original cost basis of $0. “Readily determinable fair value” is defined under FASB Statement No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, (SFAS 115), as existing when sales prices or bid-and-asked quotations are currently available on a securities exchange registered with the SEC or in the over-the-counter market.
As described in Note 11 to the consolidated financial statements included in this Annual Report on Form 10-K, we received approximately $5.22 million from various parties for selling a portion of our NextNet holdings in 2002.
We do not have any obligation to provide future funding to NextNet. We owned approximately 1.3 million shares and 2.4 million shares of NextNet Series A Preferred Stock as of December 31, 2002 and 2001, respectively. Our ownership of NextNet also decreased by approximately 177,000 shares of Series A Preferred Stock in the first quarter of 2003 from sales to two private investors totaling $750,000. Of our remaining shares, we have placed an aggregate of 583,333 in an escrow account as collateral for our loan from Entrx Corporation. In addition, we issued a warrant to an investor affiliated with a prior purchaser of NextNet shares from us, to purchase 125,000 additional shares of our Series A Preferred Stock in NextNet from us at $6.00 per share, any time prior to the close of business on May 17, 2004.
Liquidity and Capital Resources
The Company primarily funded its operations in 1999 from cash flow generated from operations. The Company investsWe invest predominantly in instruments that are highly liquid, investment grade and have maturities of less than one year. At December 31,
1999, the Company2002, we had approximately$8.0 million$549,000 in cash and cash equivalents compared to$3.1$1.33 million at December 31,1998.
Cash provided by operating activities was $5.0 million for the twelve months ended2001. As of December 31,1999 and resulted primarily from income before amortization, depreciation and other non-cash stock compensation charges2002, we had a negative working capital of$2.9 million, increases in accounts payable of $701,000, accrued expenses of $1.9$2.64 million, anddeferred revenuea stockholder’s deficit of$336,000, offset by an increase in accounts receivable of $1.1$2.33 million.Cash used in operating activities was
$2.3$8.4 million for thetwelve monthsyear ended December 31,1998 due2002, and resulted primarilytofrom an overall net loss, not including our gains on sales of NextNet shares, of approximately $11.8 million, offset by an increase in accrued expenses of $925,000, a decrease in accounts receivable of $900,000, and a decrease in notes receivable of $535,000. Cash used in operating activities was $5.5 million for the year ended December 31, 2001, and resulted primarily from a net lossbefore amortization, depreciation and other non-cash stock compensation chargesof$1.3$9.5 million and a decrease inbothdeferred revenue of $1.4 million, offset by a decrease in accountspayablereceivable of$291,000$4.0 million, andaccrued expensea decrease in notes receivable of$618,000.$1.3 million.
Cash provided by investing activities was $5.4 million for the year ended December 31, 2002, and resulted primarily from proceeds from sales of a portion of our NextNet shares. Cash used in investing activities was
$668,000$703,000 for thetwelve monthsyear ended December 31,1999,2001, and resultedmainlyprimarily from the purchase of property and equipment.Cash used in investing activities was $155,000 for the twelve months ended December 31, 1998 and consisted primarily of cash provided by the net sale of marketable securities offset by cash used to acquire Quicksilver and property equipment additions.
Cash provided by financing activities was
$629,000$2.2 million for thetwelve monthsyear ended December 31,19992002, and consisted primarily ofcash receivedproceeds fromthesale ofCommoncommon stockupon employees' exercising stock options,of $1.7 million and proceeds from a short-term loan of $1.0 million, but was partially offsetslightlybypaymentsa decrease in the line ofoutstanding debt.credit balance of $802,000. Cash provided by financing activities was$2.3$2.7 million for thetwelve monthsyear ended December 31,19982001, and consisted primarily of proceeds fromthesale of common stock of $2.3 million and proceeds from the line of credit of $1.1 million, but was partially offset by $490,000 of payments of outstanding debt.17
Future payments due under debt and lease obligations, as of December 31, 2002, are as follows (in thousands):
Year Ending
December 31,
Bank Line
Of Credit
Short -
Term Loan
Notes
Payable
Non
Cancelable
Operating
Leases
Accrued
Lease
Settlements
Total
2003
$
298
$
1,000
$
266
$
944
$
938
$
3,446
2004
164
747
—
911
2005
—
388
—
388
Total
$
298
$
1,000
$
430
$
2,079
$
938
$
3,807
We have a loan agreement, as amended, with Entrx Corporation (“Entrx”), under which Entrx agreed to lend us up to $1.75 million. We received the first advance of $1 million on November 4, 2002 and we received $750,000 from Entrx in the first quarter of 2003. Entrx must elect, at any time on or before March 31, 2003, to convert all or part of the outstanding advances into shares of Series A Preferred Stock we hold in NextNet at $6.00 per share. This conversion price is subject to downward adjustment through June 30, 2003, if NextNet or Zamba sell NextNet shares at a lower per share price, assuming that all shares are converted to NextNet common stock. Further, if we default under the loan agreement, the per share conversion price of the Series A Preferred Stock we hold in NextNet will be reduced to $3.00 per share, unless there is at the same time a default under the loan agreement by Entrx. In connection with the loan agreement, we also entered into a Pledge and Escrow Security Agreement with Entrx pursuant to which we placed in escrow a stock certificate for an aggregate of 583,333 shares of Series A Preferred Stock in NextNet as security for the loan through June 30, 2003.
On February 17, 2003, we entered into stock purchase agreements to sell 125,000 shares of our Series A Preferred Stock in NextNet to two private investors at $6.00 per share, for a total of $750,000. We received the full amount on February 17, 2003. This investor group may also receive more of our NextNet shares if, at any time prior to March 31, 2003, NextNet sells any preferred
stockshares for an aggregate purchase price equal to or in excess of Two Hundred Fifty Thousand Dollars ($250,000) at a per share purchase price that is less than $6.00 per share. In such event, we will provide these investors with an amount of additional NextNet shares that causes the per share purchase price paid to be equivalent to the lower per share price of the subsequent sale. In accordance with this provision, we provided these two investors with an additional 52,305 shares in March 2003. Also in connection with this sale, we issued a warrant to a third party affiliated with a prior purchaser of NextNet shares to purchase 125,000 additional shares of ourChairman Joe Costello.Series A Preferred Stock in NextNet from us at $6.00 per share, any time prior to the close of business on May 17, 2004.
We partly fund our operations through an Accounts Receivable Purchase Agreement with Silicon Valley Bank. We entered into this agreement on July 29, 2002. This agreement entitles us to borrow up to a maximum of $2.0 million based on eligible receivables, and is secured by virtually all of our assets. TheCompany believesbalance outstanding under this line of credit was $298,000 at December 31, 2002. Based on eligible receivables, an additional $325,000 was available for borrowing at December 31, 2002. Prior to July 29, 2002, we maintained a line of credit with Silicon Valley Bank. Although there are no financial covenants in the new agreement with Silicon Valley Bank, the bank may still declare default in certain circumstances, including our default under any leases or contracts.We believe that
itsour existing cash and cash equivalents at December 31,1999, together2002, in addition to cash we have received subsequent to December 31, 2002 under our loan agreement with Entrx Corporation and from the sale of shares of Series A Preferred Stock in NextNet, as well as cashprovided from operationswe obtain on a regular basis under our Accounts Receivable Purchase Agreement with Silicon Valley Bank, will be sufficient to meetthe Company'sour working capital and capital expenditure requirementsforthrough at leastthe next 12 months.December 31, 2003. We will continue to explore possibilities for additional financing, which may include debt, equity, or other forms of financing transactions, and other strategic alternatives that may be available to us, including a potential sale of all or a portion of our stock, assets, or remaining investment in NextNet.18
15
New Accounting Standards
Statement ofIn November 2001, the Financial Accounting
StandardStandards Board (FASB) issued Staff Announcement, Topic No.133 "AccountingD-103, regarding the income statement classification of reimbursements received forDerivative Instruments“out-of-pocket” expenses incurred. This announcement requires that out-of-pocket expenses incurred andHedging Activities" (SFAS No. 133),the related reimbursements be reflected in the income statement on a gross basis asamended,both revenue and expense. Previously, we classified these out-of-pocket expense reimbursements as a reduction of project and personnel costs. This Staff Announcement was effective for financial reporting periods beginning after December 15, 2001, and accordingly, we implemented it on January 1, 2002. We adjusted revenue for all periods reported to include out-of-pocket expense reimbursements. This change in2001, establishes new standards for recognizing all derivatives as either assetsclassification had no effect on current orliabilities, and measuring those instruments at fair value. Atpreviously reported net income (loss) or earnings (loss) per share.In June 2002, the
present time, the Company does not anticipate thatFinancial Accounting Standards Board (FASB) issued SFAS No.133146 “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 supersedes EITF No. 94-3. The principal difference between SFAS No. 146 and EITF No. 94-3 relates to when an entity can recognize a liability related to exit or disposal activities. SFAS No. 146 requires a liability be recognized for a cost associated with an exit or disposal activity when the liability is incurred. EITF No. 94-3 allowed a liability related to an exit or disposal activity, to be recognized at the date an entity commits to an exit plan. The provisions of SFAS No. 146 are effective on January 1, 2003. Accordingly, we willhave a material impact on its financial positionapply this standard to all exit orresults of operations.disposal activities initiated after January 1, 2003.Controls and Procedures
Factors That May Affect Future Results
There can be no assuranceIn order to ensure that theCompany's business will grow as anticipated or that the Company will achieve or sustain profitability on a quarterly or annual basisinformation we must disclose inthe future. The Company derives a substantial part of its revenues from a small number of clients whom, after evaluating the Company's capabilities, decide whether to engage the Company to create business case evaluations, consult on change management practices and, in some cases, to design, implement and deploy their customer care systems. A decision by any one of these clients to delay a customer care project may have a material adverse effect on the Company's business and results of operations.
In order for the Company's revenues from consulting and integration services to grow, the Company must continue to add more clients and larger projects to plan, design and implement customer care systems. The Company's inability to obtain clients for large-scale consulting and integration services could materially and adversely affect the growth of its business.
In addition to the factors listed above, actual results could vary materially from the foregoing forward-looking statements due to the Company's inability to hire and retain qualified personnel, the risk that the Company may need to enhance products and services beyond what is currently planned, the levels of promotion and marketing required to promote the Company's products and services so as to attain a competitive position in the marketplace, or other risks and uncertainties identified in this Annual Report and the Company's otherour filings with theSEC.Securities and Exchange Commission is recorded, processed, summarized and reported on a timely basis, we have formalized our disclosure controls and procedures. Our principal executive officer and principal financial officer have reviewed and evaluated our disclosure controls and procedures as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of a date within 90 days prior to the filing date of this report (the “Evaluation Date”). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective in bringing to their attention on a timely basis material information relating to Zamba required to be included in our periodic filings under the Exchange Act.Since the Evaluation Date, there have not been any significant changes in our internal controls, or in other factors that could significantly affect these controls subsequent to the Evaluation Date.
Item 7A. Quantitative and Qualitative Disclosures About Market
RiskRisk.
The Company isWe are exposed to market risk from changes in security prices and interest rates. Market fluctuations could impact our results of operations and financial condition. We are exposed to certain market risks based ontheour outstanding debt obligations of$1.4$430,000, our accounts receivable purchase agreement of $298,000, and our note payable to Entrx of $1.0 million at December 31,1999.2002. As discussed in Note510 to the consolidated financial statements, the annualized interest rates charged on our debt obligations range from 8.0% to 10.0%, and the obligations mature monthly and quarterly through December 2003. As discussed in Note 8 to our consolidated financial statements, the interest rate charged on borrowings against our accounts receivable purchase agreement is 1% per month, plus an administrative fee of 0.25%. As discussed in Note 9 to the consolidated financial statements, the interest rate charged on theCompany's long-term debt obligations range from 6%note payable to10.5%Entrx is 8%, and is payable monthly. On February 19, 2003, this loan agreement was amended. A second advance of $750,000 was paid in the first quarter of 2003 and theobligations mature quarterly on anobligation of Entrx to pay a third installmentbasis commencing inwas waived. Entrx also waived its rights to convert all outstanding advances into shares of our common stock, and terminated its option to purchase additional shares of our NextNet stock. Entrx also agreed to waive interest charges after December1999 and ending in December2003.The Company doesWe do not invest in any derivative financial instruments. Excess cash is invested in short-term, low-risk vehicles, such as money market investments. Changes in market interest rates should not have a material effect on our financial condition or results of operations.19
16
Item 8. Financial Statements and Supplemental Schedule.
The
followingFinancial Statements, Supplemental Schedule and IndependentAuditors'Auditors’ Report thereon that follow this Annual Report on Form 10-K areincludedincorporated herein(page numbers refer to pages in this Report):by reference:20
39
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
On January 25, 1999, PricewaterhouseCoopers LLP ("PwC") resigned as the Company's independent accountants, because the Company intended to enter into a business relationship with the technology consulting practice of PwC. Subsequently, the Company entered into a formal business relationship with PwC. The report of PwC on the financial statements of the Company, before restatement for the 1999 pooling-of-interests, for the year ended December 31, 1997, did not contain an adverse opinion or a disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope, or accounting principles. In connection with the audit of the Company's financial statements for the year ended December 31, 1997, and through January 25, 1999, there were no "reportable events" as that term is described in Item 304(a)(1)(v) of Regulation S-K, and there were no disagreements between the Company and PwC on any matters of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of PwC would have caused PwC to make reference to the matter in their reports on the financial statements for such years.
On February 8, 1999, the Audit Committee of the Board of Directors of the Company and subsequently on May 20, 1999, at the Annual Meeting of Stockholders, the stockholders of the Company, both approved the retention of KPMG LLP ("KPMG") to be the Company's new independent accountants. During the two fiscal years ended December 31, 1997, and December 31, 1998, and for the interim period through February 8, 1999, the Company did not seek advice from KPMG regarding (i) the application of accounting principles to a specified transaction or the type of audit opinion that might be rendered on the Company's financial statements; or (ii) any matter that was either the subject of a disagreement, as defined in paragraph (a)(1)(iv) of Item 304 of Regulation S-K or a reportable event, as described in paragraph (a)(1)(v) of Item 304 of Regulation S-K.
The resignation of PwC and retention of KPMG were reported on 8-K filings with the Securities and Exchange Commission on January 26, 1999, and February 12, 1999, respectively.
17
Item 10. Directors and Executive Officers of the Registrant.
The information concerning
the Company'sour directors and executive officers and compliance with Section 16(a) required by this item is contained in the sections entitled"Nominees"“Election of Directors” inProposalItem No. 1,"Executive Officers"“Executive Officers” and"Section“Section 16(a) Beneficial Ownership Reporting Compliance,"” appearing inthe Company'sour definitive Proxy Statement (the “Proxy Statement”) to be delivered to stockholders in connection with the Annual Meeting of Stockholders to be held onMay 18, 2000 ("Proxy Statement"). Such informationJune 5, 2003, and is incorporated herein by reference.Item 11. Executive Compensation.
The information required by this item is contained in the sections entitled
"Director Compensation"“How are Directors Compensated?” inProposalItem No. 1,"Executive“Executive Compensation” (except for the information set forth under the sub-caption “Report of the Compensation"Committee”) and"Compensation“Compensation Committee Interlocks and Insider Participation,"” appearing inthe Company'sour ProxyStatement. Such informationStatement and is incorporated herein by reference.Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item is contained in the section entitled
"Security Ownership of Certain Beneficial Owners and Management"“Stock Ownership” appearing inthe Company'sour ProxyStatement. Such informationStatement and is incorporated herein by reference.Item 13. Certain Relationships and Related Transactions.
The information required by this item is contained in the section entitled
"Certain Transactions"“Certain Relationships and Related Transactions” appearing inthe Company'sour ProxyStatement. Such informationStatement and is incorporated herein by reference.21
18
Item 14. Exhibits, Financial Statement
ScheduleSchedules and Reports on Form 8-K.(a) Documents Filed as Part of Form 10-K
(1) Financial Statements
• Consolidated Balance Sheets as of December 31, 2002 and 2001
• Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and 2000
• Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000
• Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended December 31, 2002, 2001 and 2000
• Notes to Consolidated Financial Statements
• Supplemental Schedule – Schedule II Valuation and Qualifying Accounts
• Independent Auditors’ Report
(2) Financial Statement Schedules
• All schedules for which provision is made in the applicable accounting regulations of the SEC have been omitted since they are either not required, not applicable, or the information is otherwise included, except for Schedule II, which is attached to the financial statements included in this Item 14.
(3)
and (c)Exhibits
3.01
Registrant's FourthRegistrant’s Fifth Amended and Restated Certificate of
Incorporation, dated August 3, 2001 (Incorporated by reference to Exhibit 3.01 to the Registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 2001).Incorporation(11)3.02
Certificate of Designation specifying the terms of the Series A Junior Participating Preferred Stock of the Registrant as filed with the Delaware Secretary of State on September 14,
1994 (Filed as an Exhibit to the Registrant’s Current Report on Form 8-K that was filed with the Securities and Exchange Commission on September 15, 1994, and incorporated herein by reference).1994(3)3.03
Registrant'sRegistrant’s Bylaws, as
amended (Filed as an Exhibit to the Registrant’s Current Report on Form 8-K that was filed with the Securities and Exchange Commission on September 15, 1994, and incorporated herein by reference).amended(3)4.01
Form of specimen certificate for
Stock (Incorporated by reference to Exhibit 4.01 to the Registrant’s Registration Statement on Form S-1 (No. 33-70728), that was declared effective December 9, 1993).Registrant'sRegistrant’s CommonStock(1)4.02
Rights Agreement dated September 12, 1994, and amended on December 20, 2002, between the Registrant and Norwest Bank Minnesota, N.A., as Rights Agent, which includes as exhibits thereto the form of rights certificate and the summary of rights to purchase preferred
shares (Incorporated by reference to Exhibit 4.02 to the Registrant’s Report on Form 8-K that was filed with the Securities and Exchange Commission on September 15, 1994, to Exhibit 4.01 to the Registrant’s Form 10-Q for the quarterly period ended June 30, 2002, and to Exhibit 1 to the Registrant’s filing on Form 8-A/A on December 20, 2002).shares(3)4.03
Amendment No. 1 to Rights Agreement dated January 29, 2002, by and among Zamba Corporation and Wells Fargo Bank Minnesota, N.A. f/k/a Norwest Bank Minnesota, N.A., as Rights Agent (Incorporated by reference to Exhibit 4.02 to
22
the Registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 2002).
10.01*
*Registrant'sRegistrant’s 1989 Stock Option Plan, as amended, and related
documents (Incorporated by reference to Exhibit 10.01 to the Registrant’s Registration Statement on Form S-1 (No. 33-70728), that was declared effective December 9, 1993).documents(1)10.02*
*Registrant'sRegistrant’s 1993 Equity Incentive Plan and related documents, as amended through January 10,
1998 (Incorporated by reference to Exhibit 10.02 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1997).**1998(8)10.03**Registrant's10.03
Registrant’s 1993 Directors Stock Plan, as amended, and related documents, as amended through November 14,
1995(5)1995 (Incorporated by reference to Exhibit 10.03to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1995).10.04*
*Registrant'sRegistrant’s 1994
Plan (Incorporated by reference to Exhibit 10.04 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1994).Officer'sOfficer’s OptionPlan(4)10.0510.05*
1997 Stock Option Plan for Key Employees, Consultants and Directors of QuickSilver Group, Inc.
(12)(Incorporated by reference to Exhibit 99.1 to the Registrant’s Registration Statement on Form S-8 that was declared effective on October 22, 1998).10.06*
*Registrant'sRegistrant’s 1998 Non-Officer Stock Option
Plan (Incorporated by reference to Exhibit 99.1 to the Registrant’s Registration Statement on Form S-8 that was declared effective on October 22, 1998).Plan(9)10.0710.07*
Form of Indemnification Agreement entered into by the Registrant and each of its directors and executive
officers(1)10.08Lease Agreementofficers (Incorporated byand betweenreference to Exhibit 10.12 to theRegistrant and Connecticut General Life Insurance Company dated May 2, 1994, for premises at 7301 Ohms Lane, Edina, MN 55439(2)Registrant’s Registration Statement on Form S-1 (No. 33-70728), that was declared effective December 9, 1993).10.09**Letter agreement by and between Registrant and Paul Edelhertz dated September 25, 1997(7)10.1010.08
Sublease Agreement dated November 18, 1997, by and between Registrant and ATIO Corporation USA, Inc. for premises at 7301 Ohms Lane, Edina, MN 55439(8)10.11**Change in Control Employment and Severance Agreement dated March 10, 1998, by and between Registrant and Michael A. Fabiaschi(8)10.12**Change in Control Employment and Severance Agreement dated March 10, 1998, by and between Registrant and Steve Swantek(8)10.13**Change in Control Employment and Severance Agreement dated March 10, 1998, by and between Registrant and Paul Edelhertz(8)10.14Series A Preferred Stock Purchase Agreement dated October 22, 1998, between the Registrant and Joseph Costello(11)10.15Lease Agreement dated October 20, 1995, by and between the Registrant and All Phase Telecommunication, Inc. for premises at 10061 Bubb Road, Cupertino, California 95014(11)10.16Lease Agreement dated April 8, 1998, by and between the Registrant and EOP-New England Executive Park, L.L.C. for premises at 8 New England Executive Park, Burlington, Massachusetts
01893 (Incorporated by reference to Exhibit 10.22 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1998).01893(11)10.09
19
10.17Lease Agreement dated September 14, 1998, by and between the Registrant and Square 24 Associates (d.b.a. Square 24 Associates L.P.) for premises at 3875 Hopyard Road, Pleasanton, California 94588(11)10.18Asset Purchase Agreement dated October 23, 1995 between the Registrant and Business Partner Solutions, Inc.(5)10.19Agreement and Plan of Merger and Reorganization dated July 6, 1998, between the Registrant, QuickSilver Acquisition Corp. and QuickSilver Group, Inc., and Addendum dated September 2, 1998,94588 (Incorporated by reference to Exhibit 10.23 to theAgreement and Plan of Merger and Reorganization betweenRegistrant’s Annual Report on Form 10-K for theRegistrant, QuickSilver Acquisition Corp. and QuickSilver Group, Inc.(10)year ended December 31, 1998).10.20Letter Agreement between the Registrant and Peter Marton dated March 9, 1999(13)10.2110.10*
Change of Control Agreement between the Registrant and
Peter Marton dated July 15, 1999(14)10.22Change of Control Agreement between the Registrant and MikeMichael Carrel dated July 8,1999(14)1999 (Incorporated by reference to Exhibit 10.02 to the Registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 1999).10.2310.11*
Change of Control Agreement between the Registrant and Ian Nemerov dated July 8,
1999(14)10.24Agreement and Plan of Merger and Reorganization dated December 28,1999between(Incorporated by reference to Exhibit 10.03 to theRegistrant, ZCA Corp. and Camworks, Inc.(15)Registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 1999).23
10.2510.12
Lease dated January 4, 2000, between the Registrant and WTA Campbell Technology Park
LLC (Incorporated by reference to Exhibit 10.25 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1999).LLC(16)10.2610.13
Work Letter Agreement dated January 4, 2000, between the Registrant and WTA Campbell Technology Park
LLC(16)LLC (Incorporated by reference to Exhibit 10.26 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1999).10.14
Lease Agreement dated May 5, 2000, between the Registrant and Harvard Property (Lake Calhoun), LP (Incorporated by reference to Exhibit 10.01 to the Registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 2000).
10.15
Lease Agreement dated May 31, 2000, between the Registrant and EOP-New England Executive Park, LCC (Incorporated by reference to Exhibit 10.02 to the Registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 2000).
10.16*
Registrant’s 2000 Employee Stock Purchase Plan (Incorporated by reference to Exhibit 10.3(1) to the Registrant’s Form S-8 that was filed with the Securities and Exchange Commission on June 29, 2000).
10.17*
Registrant’s 1999 Non-Officer Stock Option Plan (Incorporated by reference to Exhibit 99.1 to the Registrant’s Form S-8 that was filed with the Securities and Exchange Commission that was declared effective on December 18, 2000).
10.18*
Registrant’s 2000 Non-Officer Stock Option Plan (Incorporated by reference to Exhibit 99.2 to the Registrant’s Form S-8 that was filed with the Securities and Exchange Commission that was declared effective on December 18, 2000).
10.19
Loan and Security Agreement dated February 27, 2001, between the Registrant and Silicon Valley Bank, Commercial Finance Division (Incorporated by reference to Exhibit 10.32 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2000).
10.20
Registration Rights Agreement dated February 27, 2001, between the Registrant and Silicon Valley Bank (Incorporated by reference to Exhibit 10.33 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2000).
��
10.21
Warrant to Purchase Stock dated February 27, 2001, between the Registrant and Silicon Valley Bank (Incorporated by reference to Exhibit 10.34 to the Registrant’s Form Annual Report on 10-K for the year ended December 31, 2000).
10.22
Stock Purchase Agreement dated June 29, 2001, between Zamba Corporation and Joseph B. Costello (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated July 2, 2001).
10.23*
Warrant to Purchase Shares of Common Stock issued by Zamba Corporation to Joseph B. Costello (Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K dated July 2, 2001).
24
10.24*
Settlement and Release Agreement dated August 2, 2001, between the Registrant and Paul Edelhertz (Incorporated by reference to Exhibit 10.05 to the Registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 2001).
10.25
Amendment to Loan Document as of June 30, 2001, between the Registrant and Silicon Valley Bank (Incorporated by reference to Exhibit 10.06 to the Registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 2001).
10.26
Warrant to Purchase Stock dated August 2, 2001, between the Registrant and Silicon Valley Bank (Incorporated by reference to Exhibit 10.07 to the Registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 2001).
10.27
Amendment to Loan Document as of December 31, 2001, between Registrant and Silicon Valley Bank (Incorporated by reference to Exhibit 10.44 to the Registrant’s Form Annual Report on 10-K for the year ended December 31, 2001).
10.28
Warrant to Purchase Stock dated December 31, 2001, between the Registrant and Silicon Valley Bank (Incorporated by reference to Exhibit 10.45 to the Registrant’s Form Annual Report on 10-K for the year ended December 31, 2001).
10.29
Registration Rights Agreement dated December 31, 2001, between the Registrant and Silicon Valley Bank (Incorporated by reference to Exhibit 10.46 to the Registrant’s Form Annual Report on 10-K for the year ended December 31, 2001).
10.30
Stock Purchase Agreement dated January 31, 2002, between Zamba Corporation and Joseph B. Costello (Incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K dated March 14, 2002).
10.31
Warrant to Purchase Common Stock dated January 31, 2002, issued by Zamba Corporation to Joseph B. Costello (Incorporated by reference to Exhibit 99.2 to the Registrant’s Current Report on Form 8-K dated March 14, 2002).
10.32
Form of Stock Purchase Agreement dated February 1, 2002 (Incorporated by reference to Exhibit 99.3 to the Registrant’s Current Report on Form 8-K dated March 14, 2002).
10.33
Form of Warrant to Purchase Common Stock dated February 1, 2002 (Incorporated by reference to Exhibit 99.4 to the Registrant’s Current Report on Form 8-K dated March 14, 2002).
10.34
Third Amendment Lease dated February 6, 2002, between Zamba Corporation and Square 24 Associates (Incorporated by reference to Exhibit 10.51 to the Registrant’s Form Annual Report on 10-K for the year ended December 31, 2001).
10.35
Sublease Consent and Agreement dated February 7, 2002, between Zamba Corporation, Square 24 Associates and Park Place Associates (Incorporated by
25
reference to Exhibit 10.52 to the Registrant’s Form Annual Report on 10-K for the year ended December 31, 2001).
10.36
Sublease Agreement dated January 9, 2002, between Zamba Corporation and Park Place Capital Corporation (Incorporated by reference to Exhibit 10.53 to the Registrant’s Form Annual Report on 10-K for the year ended December 31, 2001).
10.37
Sublease Agreement dated February 19, 2002, between Zamba Corporation and Purlight LLC (Incorporated by reference to Exhibit 10.54 to the Registrant’s Form Annual Report on 10-K for the year ended December 31, 2001).
10.38
Strategic Alliance Agreement between Zamba Corporation, HCL Technologies America, Inc. and HCL Technologies Limited, India, dated February 22, 2002 (Incorporated by reference to Exhibit 99.5 to the Registrant’s Current Report on Form 8-K dated March 14, 2002).
10.39
Stock Purchase Agreement dated February 21, 2002, between Zamba Corporation and HCL Technologies America, Inc. (Incorporated by reference to Exhibit 99.6 to the Registrant’s Current Report on Form 8-K dated March 14, 2002).
10.40
Warrant to Purchase Common Stock dated February 21, 2002, issued by Zamba Corporation to HCL Technologies America, Inc. (Incorporated by reference to Exhibit 99.7 to the Registrant’s Current Report on Form 8-K dated March 14, 2002).
10.41
Stock Purchase Agreement dated February 26, 2002, between Zamba Corporation and Joseph B. Costello (Incorporated by reference to Exhibit 99.8 to the Registrant’s Current Report on Form 8-K dated March 14, 2002).
10.42
Stock Purchase Agreement dated March 25, 2002, between Zamba Corporation and Joseph B. Costello (Incorporated by reference to Exhibit 10.59 to the Registrant’s Form Annual Report on 10-K for the year ended December 31, 2001).
10.43
Amendment No. 1 to the Stock Purchase Agreement date February 26, 2002, dated March 25, 2002, between Zamba Corporation and Joseph B. Costello (Incorporated by reference to Exhibit 10.60 to the Registrant’s Form Annual Report on 10-K for the year ended December 31, 2001).
10.44
Stock Purchase Agreement between Jafco America Ventures, Inc. and Zamba Corporation, dated April 30, 2002 (Incorporated by reference to Exhibit 10.01 to the Registrant’s Quarterly Report on Form 10-Q for the period ended June 30,2002).
10.45
Lease Termination Agreement between EOP-England Executive Park, LLC and Zamba Corporation, dated May 31, 2002 (Incorporated by reference to Exhibit b10.01 to the Registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 2002)
26
10.46
Stock Purchase Agreement between Robert S. Colman Trust and Zamba Corporation, dated May 29, 2002 (Incorporated by reference to Exhibit 10.02 to the Registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 2002)
10.47
Stock Purchase Agreement between Doll Technology Investment Fund and Zamba Corporation, dated June 7, 2002 (Incorporated by reference to Exhibit 10.03 to the Registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 2002)
10.48
Stock Purchase Agreement between Doll Technology Affiliates Fund and Zamba Corporation, dated June 7, 2002 (Incorporated by reference to Exhibit 10.04 to the Registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 2002).
10.49
Stock Purchase Agreement between Doll Technology Side Fund L.P. and Zamba Corporation, dated June 7, 2002 (Incorporated by reference to Exhibit 10.05 to the Registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 2002)
10.50
Stock Purchase Agreement between Thomas Magne and Zamba Corporation, dated June 13, 2002 (Incorporated by reference to Exhibit 10.05 to the Registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 2002).
10.51
Zamba Corporation Second Amendment to Lease Agreement between Acky-Calhoun, LLC and Zamba Corporation, dated July 11, 2002 (Incorporated by reference to Exhibit 10.07 to the Registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 2002).
10.52
Accounts Receivable Purchase Agreement between Silicon Valley Bank and Zamba Corporation, dated July 29, 2002 (Incorporated by reference to Exhibit 10.08 to the Registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 2002).
10.53
Stock Purchase Agreement between John T. Johnson and Zamba Corporation, dated August 9, 2002 (Incorporated by reference to Exhibit 10.01 to the Registrant’s Quarterly Report on Form 10-Q for the period ended September 30, 2002).
10.54
Stock Purchase Agreement between Bob Tallard and Zamba Corporation, dated August 9, 2002 (Incorporated by reference to Exhibit 10.02 to the Registrant’s Quarterly Report on Form 10-Q for the period ended September 30, 2002).
10.55
Stock Purchase Agreement between Herbert P. Koch and Zamba Corporation, dated August 13, 2002 (Incorporated by reference to Exhibit 10.03 to the Registrant’s Quarterly Report on Form 10-Q for the period ended September 30, 2002).
10.56
Stock Purchase Agreement between Brian Lawton and Zamba Corporation, dated August 19, 2002 (Incorporated by reference to Exhibit 10.04 to the Registrant’s Quarterly Report on Form 10-Q for the period ended September 30, 2002).
27
10.57
Settlement Agreement and Release between Fidelity Leasing, Zamba Corporation and Michael H. Carrel, dated September 24, 2002 (Incorporated by reference to Exhibit 10.06 to the Registrant’s Quarterly Report on Form 10-Q for the period ended September 30, 2002).
10.58
Settlement Agreement and Release by and between WTA Campbell Technology Park, LLC, and Zamba Corporation, dated October 9, 2002 (Incorporated by reference to Exhibit 10.07 to the Registrant’s Quarterly Report on Form 10-Q for the period ended September 30, 2002).
10.59
Lease Termination Agreement and Release, by and between Army Corps Centre Operating Associates, LP, a New Mexico Limited Partnership, a/k/a Army Corps Operating Associates, LP, a New Mexico Limited Partnership, successor-in-interest to CC Commercial LP (“Army Corps”), Zamba Corporation, a Delaware Corporation (“Zamba”) and ZCA Corporation, a Minnesota Corporation f/k/a Camworks, Inc. (“ZCA”), dated October 10, 2002 (Incorporated by reference to Exhibit 10.08 to the Registrant’s Quarterly Report on Form 10-Q for the period ended September 30, 2002).
10.60
Loan Agreement by and between Entrx Corporation and Zamba Corporation, dated November 5, 2002 (Incorporated by reference to the Registrant’s Current Report on Form 8-K dated November 5, 2002).
10.61*
Change in Control Employment and Severance Agreement between Norman D. Smith and Zamba Corporation, dated November 26, 2002.
10.62*
Change in Control Employment and Severance Agreement between Paul McLean and Zamba Corporation, dated January 14, 2003.
10.63
Settlement Agreement and Release between Todd Fitzwater and Zamba Corporation, dated January 27, 2003.
10.64
Stock Purchase Agreement between John Schwieters and Zamba Corporation, dated February 12, 2003.
10.65
Stock Purchase Agreement between John Schwieters and Zamba Corporation, dated February 12, 2003.
10.66
Stock Purchase Agreement between Joel Schwieters and Zamba Corporation, dated February 14, 2003.
10.67
Warrant to Purchase Shares of Series A Preferred Stock of NextNet Wireless, Inc. between Morgan Street Partners, LLC and Zamba Corporation, dated February 17, 2003.
10.68
Amendment No. 1 to Loan Agreement between Entrx Corporation and Zamba Corporation, dated February 19, 2003.
10.69
Settlement Agreement and Release between Key Equipment Finance and Zamba Corporation, dated March 13, 2003.
23.01
Consent of KPMG
LLP.LLP23.02Consent24.01
Power of
PricewaterhouseCoopers LLPAttorney (included on signature page to this report).2799.01
Cautionary Statement Regarding Forward-Looking Statements.
28
99.02
Certification of Chief Executive Officer and Chief Financial
Data ScheduleOfficer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
Management contract or compensatory plan required to be filed as an exhibit to Form 10-K.
*Confidential treatment has been obtained for certain portions of this agreement**Management contract or compensatory plan required to be filed as an exhibit to Form 10-K(1)Filed as an Exhibit to the Registrant's Registration Statement on Form S-1 (No. 33-70728), that was declared effective December 9, 1993, and incorporated herein by reference(2)Filed as an Exhibit to the Registrant's Form 10-Q for the quarterly period ended June 30, 1994, and incorporated herein by reference(3)Filed as an Exhibit to the Registrant's Report on Form 8-K that was filed with the Securities and Exchange Commission on September 15, 1994, and incorporated herein by reference(4)Filed as an Exhibit to the Registrant's Form 10-K for the year ended December 31, 1994, and incorporated herein by reference(5)Filed as an Exhibit to the Registrant's Form 10-K for the year ended December 31, 1995, and incorporated herein by reference(6)Filed as an Exhibit to the Registrant's Form 10-Q for the quarterly period ended June 30, 1997, and incorporated herein by reference(7)Filed as an Exhibit to the Registrant's Form 10-Q for the quarterly period ended September 30, 1997, and incorporated herein by reference
20
(8)Filed as an Exhibit to the Registrant's Form 10-K for the year ended December 31, 1997, and incorporated herein by reference(9)Filed as an Exhibit to the Registrant's Registration Statement on Form S-8 that was declared effective on September 2, 1998, and incorporated herein by reference(10)Filed as an Exhibit to the Registrant's Report on Form 8-K that was filed with the Securities and Exchange Commission on October 7, 1998, and incorporated herein by reference(11)Filed as an Exhibit to the Registrant's Form 10-K for the year ended December 31, 1998, and incorporated herein by reference(12)Filed as an Exhibit to the Registrant's Registration Statement on Form S-8 that was declared effective on October 22, 1998, and incorporated herein by reference(13)Filed as an Exhibit to the Registrant's Form 10-Q for the quarterly period ended March 31, 1999, and incorporated herein by reference.(14)Filed as an Exhibit to the Registrant's Form 10-Q for the quarterly period ended June 30, 1999, and incorporated herein by reference.(15)Filed as an Exhibit to the Registrant's Report on Form 8-K that was filed with the Securities and Exchange Commission on January 12, 2000 and incorporated herein by reference(16)Filed as an Exhibit to this Form 10-K
Item 14(b).(b) Reports on Form 8-K
On
January 12, 2000, the CompanyFebruary 26, 2003, we filed a report on Form 8-K to report theacquisitionfollowing:On February 26, 2003, we issued a press release in conjunction with Entrx Corporation to announce that we had received another $750,000 from Entrx Corporation under the financing arrangement that we had previously announced on November 5, 2002, and also received an additional $750,000 from third party purchasers of
Camworks,some of our shares of NextNet Wireless, Inc. Series A Preferred Stock.
On January 21, 2000, the Company filed a Form 8-K to report the acquisition of Fusion Consulting, Inc.(c) Exhibits - See Item 14 (a) (3).
21(d) Financial Statement Schedules - See Item 14(a)(2).29
Independent
Auditors'Auditors’ ReportThe Board of Directors and Stockholders
ofZAMBA Corporation:
We have audited the consolidated financial statements of ZAMBA Corporation and subsidiaries as
of and for the years ended December 31, 1999 and 1998 aslisted in the accompanying index. In connection with ourauditaudits of the consolidated financial statements, we also have audited the financial statement scheduleas of and for the years ended December 31, 1999 and 1998 aslisted in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of theCompany'sCompany’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on ouraudit.audits.
We conducted our audits in accordance with auditing standards generally accepted
auditing standards.in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ZAMBA Corporation and subsidiaries as of December 31,
19992002 and19982001, and the results of their operations and their cash flows for each of the yearsthenin the three-year period ended December 31, 2002, in conformity with accounting principles generally acceptedaccounting principles.in the United States of America. Also in our opinion, the related financial statement schedule,as of and for the years ended December 31, 1999 and 1998when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We previously audited and reported on the statements of operations and cash flows of Camworks, Inc. for the year ended December 31, 1997. The contribution of Camworks, Inc. to combined revenues and net loss represented 12% and 0% of the restated totals for the 1999 pooling-of-interests. Separate financial statements of ZAMBA Corporation included in the 1997 restated statements of operations and cash flows were audited and reported on separately by other auditors. We also audited the combination of the accompanying consolidated statements of operations and cash flows for the year ended December 31, 1997 after restatement for the 1999 pooling-of-interests; in our opinion, such consolidated statements have been properly combined on the basis described in Note 4.
/s/ KPMG LLP
Minneapolis, MinnesotaJanuary 21, 2000
22
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors andStockholders of ZAMBA Corporation:
We have audited the statements of operations and cash flows, and the financial statement schedule of ZAMBA Corporation, formerly known as Racotek, Inc. (the Company), for the year ended December 31, 1997, before restatement for the 1999 pooling-of-interests described in Note 4 to the financial statements included herein. These financial statements and financial statement schedule, which are not included in this Annual Report on Form 10-K, are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of ZAMBA Corporation for the year ended December 31, 1997, before restatement for the 1999 pooling-of-interests described in Note 4 to the financial statements included herein, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as whole, before restatement for the 1999 pooling-of-interests described in Note 4 to the financial statements included herein, presents fairly, in all material respects, the information required to be included therein.
/s/ PricewaterhouseCoopersKPMG LLPMinneapolis, Minnesota
January 22, 2003, except as to note 10, which is as of January 27, 2003, notes 2, 9, 11 and 18, which are as of February 19, 2003, and note 17, which is as of March 13, 2003
30
Minneapolis, MinnesotaJanuary 12, 1998
23
ZAMBA CORPORATION
December 31,
19992002 and19982001(In thousands, except share and per share data)
2002
2001
ASSETS
Current assets:
Cash and cash equivalents
$
549
$
1,326
Accounts receivable, net
662
1,556
Unbilled receivables
470
608
Notes receivable
—
560
Notes receivable - related parties
—
310
Prepaid expenses and other current assets
507
737
Total current assets
2,188
5,097
Property and equipment, net
531
1,799
Restricted cash
—
471
Other assets
102
301
Total assets
$
2,821
$
7,668
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Line of credit
$
298
$
1,100
Note payable
1,000
—
Current installments of long-term debt
266
392
Accounts payable
584
1,059
Accrued expenses
2,593
2,490
Deferred revenue
57
101
Deferred gain on sale of investment
25
—
Total current liabilities
4,823
5,142
Long-term debt, less current installments
164
194
Other long-term liabilities
164
244
Commitments and contingencies (Notes 4 and 17)
Total liabilities
5,151
5,580
Stockholders’ equity (deficit) :
Preferred stock, $0.01 par value, 5,000,000 shares authorized, none issued or outstanding
—
—
Common stock, $0.01 par value, 120,000,000 shares authorized, 38,822,679 and 35,007,063 issued and outstanding at December 31, 2002 and 2001, respectively
388
350
Additional paid-in capital
86,060
84,403
Note receivable from director
—
(500
)
Accumulated deficit
(88,778
)
(82,165
)
Total stockholders’ equity (deficit)
(2,330
)
2,088
Total liabilities and stockholders’ equity
$
2,821
$
7,668
19991998(In thousands,except share andper share data)ASSETSCurrent assets:Cash and cash equivalents$7,969$3,054Accounts receivable, net3,3632,353Unbilled receivables274309Prepaid expenses and other current assets239299Total current assets11,8456,015Property and equipment, net1,0361,275Restricted cash110210Identifiable intangible assets, net3,0446,768Goodwill, net6738Other assets6265Total assets$16,164$14,371LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities:Current installments of long-term debt$573$320Line of credit30Accounts payable951250Accrued expenses2,711816Deferred revenue763427Total current liabilities4,9981,843Long-term debt, less current installments8161,333Commitments (Note 3)Total liabilities5,8143,176Stockholders' equity:Preferred stock, $0.01 par value, 5,000,000 shares authorized, none issued or outstandingCommon stock, $0.01 par value, 55,000,000 shares authorized, 31,029,517 and 30,014,203 issued and outstanding at December 31, 1999 and 1998, respectively310300Additional paid-in capital79,90078,748Accumulated deficit(69,860)(67,853)Total stockholders' equity10,35011,195Total liabilities and stockholders' equity$16,164$14,371The accompanying notes are an integral part of the consolidated financial statements.
31
24
ZAMBA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31,
1999, 19982002, 2001 and19972000(In thousands, except share and per share data)
2002
2001
2000
Revenues
Professional services
$
10,184
$
33,302
$
41,740
Reimbursable expenses
915
3,486
4,426
Total revenue
11,099
36,788
46,166
Costs and expenses:
Project and personnel costs
9,366
20,036
20,549
Reimbursable expenses
915
3,486
4,426
Sales and marketing
1,750
5,824
5,791
General and administrative
7,291
14,503
14,624
Restructuring charges and non-recurring items
3,321
2,188
753
Amortization of intangibles
—
231
2,881
Loss from operations
(11,544
)
(9,480
)
(2,858
)
Other income (expense):
Gain of sale of NextNet shares
5,199
—
—
Interest income
12
139
251
Interest expense
(280
)
(188
)
(69
)
Other income (expense), net
4,931
(49
)
182
Net loss
$
(6,613
)
$
(9,529
)
$
(2,676
)
Net loss per share - basic and diluted
$
(0.17
)
$
(0.28
)
$
(0.08
)
Weighted average common shares outstanding
38,419,440
33,567,564
31,571,549
199919981997(In thousands, exceptshare and per share data)Net revenues:Services$27,993$8,992$5,487Products28336687628,2769,3586,363Cost and expenses:Project costs14,2624,4404,546Product costs199471,266Other costs3,00073012Sales and marketing2,6762,1864,237General and administrative6,0402,8632,709Research and development1,0693,286Non-cash compensation32560Amortization of intangibles3,771936Loss from operations(1,997)(2,973)(9,693)Other income (expense):Interest income97229427Sublease income0183Interest expense(107)(59)(8)(10)188422Net loss$(2,007)$(2,785)$(9,271)Net loss per sharebasic and diluted$(0.07)$(0.10)$(0.36)Weighted average common shares outstanding30,547,75526,712,00025,931,750The accompanying notes are an integral part of the consolidated financial statements.
32
25
ZAMBA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
1999, 19982002, 2001 and19972000(In thousands)
2002
2001
2000
Cash flows from operating activities:
Net loss
$
(6,613
)
$
(9,529
)
$
(2,676
)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization
438
987
3,916
Loss on disposal of fixed assets
(2
)
18
63
Provision for bad debts
20
423
965
Non-cash compensation – forgiveness of director loan
443
—
—
Gain on sale of NextNet shares
(5,199
)
—
—
Changes in operating assets and liabilities:
Accounts receivable
899
4,027
(3,164
)
Unbilled receivables
137
(182
)
(152
)
Notes receivable
535
1,276
(1,979
)
Prepaid expenses and other assets
430
(75
)
(590
)
Accounts payable
(410
)
(530
)
510
Accrued expenses
925
(571
)
277
Deferred revenue
(44
)
(1,379
)
717
Net cash used in operating activities
(8,441
)
(5,535
)
(2,113
)
Cash flows from investing activities:
Purchase of property and equipment
(115
)
(748
)
(1,433
)
Proceeds from sale of NextNet shares
5,224
—
—
Notes receivable - related parties
310
45
(356
)
Proceeds from sale of property and equipment
4
—
—
Net cash provided by (used in) investing activities
5,423
(703
)
(1,789
)
Cash flows from financing activities:
Proceeds from line of credit, net
(802
)
1,100
—
Proceeds from note payable
1,000
—
—
Proceeds from exercises of options and warrants
13
57
984
Proceeds from sale of common stock
1,714
2,261
255
Proceeds from debt
—
—
113
Payments on debt
(155
)
(490
)
(426
)
Changes in restricted cash
471
(207
)
(154
)
Net cash provided by financing activities
2,241
2,721
772
Net decrease in cash and cash equivalents
(777
)
(3,517
)
(3,130
)
Cash and cash equivalents, beginning of year
1,326
4,843
7,973
Cash and cash equivalents, end of year
$
549
$
1,326
$
4,843
Supplemental Schedule of Disclosures of Cash Flow Information:
Cash paid during the year for interest
$
221
$
185
$
149
199919981997(In thousands)Cash flows from operating activities:Net loss$(2,007)$(2,785)$(9,271)Adjustments to reconcile net loss to net cash provided by (used in) operating activities:Depreciation and amortization4,6101,4681,024Loss on sale of fixed assets8Write-down of fixed assets519Forgiveness of promissory note receivable150Write-down of inventories207Amortization of premiums (discounts) on investments(17)8Non-cash stock compensation32560147Changes in operating assets and liabilities:Accounts receivable(1,010)8918Unbilled receivables35(295)15Inventories167Prepaid expenses and other current assets6055103Accounts payable701(291)(642)Accrued expenses1,904(618)(117)Deferred revenue336(38)271Net cash provided by (used in) operating activities4,954(2,295)(6,651)Cash flows from investing activities:Purchase of investments(2,327)(2,250)Proceeds from maturity of investments4,5779,000Purchase of property and equipment(600)(329)(156)Proceeds from sale of fixed assets91Acquisition, net of cash acquired(2,128)Other(68)(39)10Net cash provided by (used in) investing activities(668)(155)6,604Cash flows from financing activities:Proceeds from exercises of options and warrants729178243Proceeds from sale of preferred stock2,000Proceeds from debt1009669Payments on debt(290)(70)(19)Changes in restricted cash100155104Dividends(10)(36)Advance to stockholder(150)Net cash provided by financing activities6292,323247Net increase (decrease) in cash and cash equivalents4,915(127)200Cash and cash equivalents, beginning of period3,0543,1812,981Cash and cash equivalents, end of period$7,969$3,054$3,181The accompanying notes are an integral part of the consolidated financial statements.
33
26
ZAMBA CORPORATION
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS'STOCKHOLDERS’ EQUITY (DEFICIT)Years ended December 31,
1999, 19982002, 2001 and19972000(In thousands, except share data)
Common Stock
Additional
Paid-In
Capital
Note
Receivable
From
Director
Accumulated
Deficit
Total
Stockholders’
Equity
(Deficit)
Shares
Par
ValueBalances at December 31, 1999
31,109,518
$
311
$
79,900
$
—
$
(69,960
)
$
10,251
Exercise of stock options
962,543
10
1,474
—
—
1,484
Note receivable from director
—
—
—
(500
)
—
(500
)
Issuance of common stock
92,198
1
254
—
—
255
Amortization of Non-cash compensation
—
—
248
—
—
248
Net loss
—
—
—
—
(2,676
)
(2,676
)
Balances at December 31, 2000
32,164,259
322
81,876
(500
)
(72,636
)
9,062
Exercise of stock options
186,425
2
55
—
—
57
Issuance of common stock
2,656,379
26
2,235
—
—
2,261
Amortization of Non-cash compensation
—
—
237
—
—
237
Net loss
—
—
—
—
(9,529
)
(9,529
)
Balances at December 31, 2001
35,007,063
350
84,403
(500
)
(82,165
)
2,088
Exercise of stock options
30,018
—
13
—
—
13
Issuance of common stock
4,035,598
40
1,674
—
—
1,714
Put option exercise by director
(250,000
)
(2
)
(55
)
500
—
443
Amortization of Non-cash compensation
—
—
25
—
—
25
Net loss
—
—
—
—
(6,613
)
(6,613
)
Balances at December 31, 2002
38,822,679
$
388
$
86,060
$
—
$
(88,778
)
$
(2,330
)
Common StockShares$0.01 ParValueAdditionalPaid-InCapitalAccumulatedDeficitPromissoryNoteReceivableTotalStockholders'Equity(In thousands, except share and per share data)Balances at December 31, 199625,740,293$257$70,923$(55,797)$$15,383Exercise of stock options258,2652241243Stock options issued to consultants1146147Dividends declared(36)(36)Other non-cash item77Net loss(9,271)(9,271)Promissory note receivable(150)(150)Balances at December 31, 199725,998,55826071,281(65,068)(150)6,323Exercise of stock options143,3302176178Shares issued in acquisition2,337,980232,9292,952Options and warrants issued in acquisition1,2751,275Issuance and conversion of preferred to common1,000,000101,9902,000Conversion of note to common stock534,33551,0321,037Dividends declared(10)(10)Non-cash compensation6060Other non-cash item1515Forgiveness of promissory note receivable150150Net loss(2,785)(2,785)Balances at December 31, 199830,014,20330078,748(67,853)11,195Exercise of stock options497,5204725729Exercise of warrants461,1835(5)Non-cash compensation325325Conversion of note to common stock56,6111107108Net loss(2,007)(2,007)Balances at December 31, 199931,029,517$310$79,900$(69,860)$$10,350The accompanying notes are an integral part of the consolidated financial statements.
34
27
ZAMBA CORPORATION
CONSOLIDATEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Business Description:
ZAMBA Corporation("ZAMBA" or "the Company") provides comprehensive Internetis a customer care services company. We help our clients be more successful in acquiring, servicing, andCustomer Relationship Management solutions to Fortune 500 companies. ZAMBA helps itsretaining their customers. We provide strategy and business process consulting, as well as customization and systems integration for software applications, which we call “packages,” that our clientsincrease customer loyalty and sales by improving those areas within their business that impact their customers.purchase from third parties. We derive substantially all of our revenues from professional services. Prior to October 1998,the Company waswe were known as Racotek, Inc.Basis of
ReportingReporting:
The accompanying consolidated financial statements of ZAMBA include the accounts of Camworks which was acquiredOur fiscal year-end is December29, 1999, a transaction accounted for by the pooling-of-interests method and its wholly owned subsidiary QuickSilver which was acquired during 1998 (see Note 4).31. Allintercompanyinter-company accounts and balances have been eliminated in consolidation.Use of Estimates:
The preparation of financial statements inconformityaccordance with auditing standards generally acceptedaccounting principlesin the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.Cash Equivalents:
The Company considersWe consider all highly liquid investments in money market funds or other investments with initial maturities of three months or less to be cash equivalents.Revenue Recognition:
We derive our revenues from systems integration services and post-implementation support agreements. Revenuesfrompursuant to fixed bid contracts are recognized as the services areperformedrendered based on thepercent-of-completionpercentage-of-completion method(theof accounting (based on the ratio of hours incurred to total estimatedhourshours) in accordance with AICPA Statement of Position 81-1, “Accounting for Performance of Construction-type and Certain Production-type Contracts.” These contracts are considered substantially complete upon customer acceptance. Estimated losses on long-term contracts are recognized in the period in which a loss becomes apparent. Revenue pursuant tocomplete the contract). Revenue fromtime andmaterialmaterials contracts are recognized as the services are performed. Customer support revenues are recognized ratably over the term of the underlying support agreements. Revenue also includes reimbursable expenses, as per Financial Accounting Standards Board (FASB) Staff Announcement, Topic No. D-103.
Deferred revenue is comprised of amounts received or billed in advance of services to be performed. Unbilled revenue represents amounts recognized on services performed in advance of billings in accordance with the terms of the contract.
Revenue from software sold under license agreements, included in product revenue, is recognized as revenue upon shipment if there are no post-delivery obligations, and if the terms of the agreement are such that the payment of the obligation is non-cancelable and non-refundable. Generally, other product revenue is recognized upon shipment.
Research and Development Costs:
There were no software development costs capitalized during 1999, 1998, and 1997. Amortization expense of $0, $0, and $121,000 relating to capitalized costs was recognized for the years ended December 31, 1999, 1998, and 1997, respectively.
All other research and development expenditures are charged to expense as incurred.
As a result of the transfer of the NextNet technology in September 1998 (see Note 6) the Company did not incur any research and development expenses in 1999.
28
Property and Equipment:
Property and equipment are stated at cost. Significant additions or improvements extending asset lives are capitalized; normal maintenance and repair costs are expensed as incurred. Depreciation is determined using the straight-line method over the estimated useful lives of the assets, which range from two tosevenfive years. Leasehold improvements are amortized on a straight-line basis over the shorter of the estimated useful lives of the assets or the underlying leaseterm (approximately five years).term. The cost and accumulated depreciation relating to leasehold improvements in facilities that are terminated earlier than the original lease terms, are written off at the time of lease termination. The cost and related accumulated depreciation or amortization of assets sold or disposed of, are removed from the accounts and the resulting gain or loss is included in operations.
Intangible Assets:
Intangible assets are being amortized over the economic useful lives of between two and five years.
The Company assesses the potential impairment of its intangible assets based on anticipated cash flows from operations. No impairment charges were recorded in 1999, 1998 or 1997.Income Taxes:
The Company utilizesWe utilize the asset and liability method of accounting for income taxes whereby deferred taxes are determined based on the difference between the financial statement and taxbasesbasis of assets and liabilities35
using enacted tax rates in effect for the years in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the sum of the tax currently payable and the change in the deferred tax assets and liabilities during the period.
Stock-Based Compensation:
The Company hasWe have chosen to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,"Accounting“Accounting for Stock Issued to Employees,"” and related interpretations (APB No. 25).The Company accountsWe account for stock-based compensation to non-employees using the fair value method prescribed by Statements of Financial Accounting Standards (SFAS) No. 123. Accordingly, compensation costs for stock options granted to employees are measured as the excess, if any, of the value ofthe Company'sour stock at the date of the grant over the amount an employee must pay to acquire the stock. Compensation cost for stock options granted to non-employees is measured as the fair value of the option at the date of grant. Such compensation costs, if any, are amortized on a straight-line basis over the underlying option vesting terms.Net Loss Per Share:
Basic and diluted net loss per share is computed by dividing the net loss by the weighted average number of shares of common stock outstanding during the period.AssumedA total of 0, 5,045 and 2,730,584 assumed conversion shares for the years ended December 31, 2002, 2001 and 2000, respectively, were excluded from the net loss per share computation as their effect isantidilutive.anti-dilutive. Common stock options could potentially dilute basic earnings per share in future periods ifthe Company generateswe generate net income.Reclassifications:
Reclassifications:
Certain prior year amounts have been reclassified to conform to the current year presentation.New Accounting Standards:
In November 2001, the Financial Accounting Standards Board (FASB) issued Staff Announcement, Topic No. D-103, regarding the income statement classification of reimbursements received for “out-of-pocket” expenses incurred. This Staff Announcement requires that out-of-pocket expenses incurred and the related reimbursements be reflected in the income statement on a gross basis as both revenue and expense. Previously, we classified these out-of-pocket expense reimbursements as a reduction of project and personnel costs. This Staff Announcement was effective for financial reporting periods beginning after December 15, 2001, and accordingly, we implemented this Staff Announcement on January 1, 2002. We adjusted revenue for all periods reported to include out-of-pocket expense reimbursements. This change in classification had no effect on current or previously reported net loss or loss per share.
In June 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 supersedes EITF No. 94-3. The principal difference between SFAS No. 146 and EITF No. 94-3 relates to when an entity can recognize a liability related to exit or disposal activities. SFAS No. 146 requires a liability be recognized for a cost associated with an exit or disposal activity when the liability is incurred. EITF No. 94-3 allowed a liability related to an exit or disposal activity, to be recognized at the date an entity commits to an exit plan. The provisions of SFAS No. 146 are effective on January 1, 2003. Accordingly, we will apply this standard to any exit or disposal activities initiated after January 1, 2003.
2.LIQUIDITY AND GOING CONCERN MATTERS:
We incurred significant losses and negative cash flows from operations during the year ended December 31, 2002, and continued to incur losses in the first two months of fiscal 2003. We also had a negative working capital of $2.64 million and a stockholders’ deficit of $2.33 million at December 31, 2002. To fund operations, we raised $9.40 million in funding in 2002 and the first quarter of 2003, as described below. Our ability to continue as a going concern depends upon our ability to continue to access our line of credit facility, achieve sustained profitability and raise cash from further sales of our investment in NextNet Wireless, Inc. The accompanying financial statements have been prepared on a going concern basis, which
36
assumes continuity of operations and realization of assets and liabilities in the ordinary course of business. These financial statements do not include any adjustments that might result if we were forced to discontinue our operations.
To fund our operations, we received approximately $7.90 million in financing in 2002. This amount includes approximately $5.22 million in exchange for selling some of our NextNet Wireless, Inc. (“NextNet”) stock, a loan in the amount of $1 million (as described in the next paragraph), and an additional $1.68 million in exchange for selling some of our own common stock.
We received $750,000 in additional funding in the first quarter of 2003 from Entrx Corporation (“Entrx”), to fund our working capital needs. This funding was through a loan agreement under which Entrx agreed to lend us up to $2.5 million in three separate advances. We received the first advance of $1 million on November 4, 2002. The second advance was to be made on December 15, 2002 and third advance was to be made on February 15, 2003, upon the achievement of certain prescribed business milestones by us. This agreement was amended on February 19, 2003, and the obligation of Entrx to pay the third installment was waived. See Note 9 for additional discussion.
We also received $750,000 on February 17, 2003, when we entered into stock purchase agreements with two private investors, which resulted in our transferring to them approximately 177,000 shares of our Series A Preferred Stock in NextNet. In connection with this sale, we issued a warrant to an investor affiliated with a prior purchaser of NextNet shares from us to purchase 125,000 additional shares of our Series A Preferred Stock in NextNet from us at $6.00 per share, any time prior to the close of business on May 17, 2004.
We believe that our existing cash and cash equivalents at December 31, 2002, cash we have received subsequent to December 31, 2002 from Entrx and from the sale of a portion of our Series A preferred stock in NextNet, and cash that we can obtain under our Accounts Receivable Purchase Agreement with Silicon Valley Bank will be sufficient to meet our working capital and capital expenditure requirements through at least December 31, 2003. We will continue to explore possibilities for additional financing, which may include debt, equity, or other forms of financing transactions, and other strategic alternatives that may be available to us, including a potential sale of all or a portion of our stock, assets, or remaining investment in NextNet.
37
29
2.3. SELECTED BALANCE SHEET INFORMATION:
December 31,19991998(in thousands)Accounts Receivable, Net:Accounts receivable$3,639$2,594Less allowance for bad debts(276)(241)$3,363$2,353Property and Equipment, Net:Computer equipment$2,884$2,565Furniture and equipment822555Leasehold improvements1861863,8923,306Less accumulated depreciation and amortization(2,856)(2,031)$1,036$1,275Accrued Expenses:Payroll related$1,292$140Vacation485265Interest payable9422Professional fees48750Subcontractor fees14144Other212295$2,711$816
(in thousands)
December 31, 2002
December 31, 2001
Accounts receivable, net:
Accounts receivable
$
806
$
1,739
Less allowance for doubtful accounts
(144
)
(183
)
Totals
$
662
$
1,556
Property and equipment, net:
Computer equipment
$
802
$
1,695
Furniture and equipment
286
614
Leasehold improvements
60
1,189
Totals
1,148
3,498
Less accumulated depreciation and amortization
(617
)
(1,699
)
Totals
$
531
$
1,799
Accrued Expenses:
Payroll related
$
175
$
242
Vacation
327
672
Restructuring costs/Accrued lease charges
1,526
627
Interest payable
20
17
Professional fees
313
325
Subcontractor fees
87
4
Other
309
847
Total
2,757
2,734
Other long term liabilities
164
244
Accrued expenses
$
2,593
$
2,490
3.4. LEASE COMMITMENTS:
The Company maintains itsWe maintain our corporate
officeheadquarters in Minneapolis, Minnesotaand operating offices in St. Paul, Minnesota, Cupertino and Pleasanton, California, Burlington, Massachusetts and Colorado Springs, Coloradounder terms ofnoncancelablea non-cancelable operatingleaseslease, whichexpire between August 2000 andexpires in December 2005.These leases require the CompanyThis lease requires us to pay a pro rata share of thelessor'slessor’s operating costs. We also lease executive offices in San Jose, California and Toronto, Ontario, both of which are under lease commitments of less than one year. In addition to the office space leases,the Companywe alsohas noncancelablehave non-cancelable operating leases for furniture and equipment.
Thecorporate office lease requires ZAMBA to maintain a restricted cash balance as security for the Company's obligations under the lease. The remainingleases requirethe Companyus to provide securitydeposits as part of the lease agreement.deposits.Total
equipment rent and rentrental expense, including a pro rata share of thelessor'slessor’s operating costs, were$943,000, $380,000,$2,607,884, $3,546,144 and$805,000$2,247,000, for the years ended December 31,1999, 19982002, 2001 and1997,2000, respectively.38
30
Future minimum lease payments for office space and equipment undernoncancelablenon-cancelable operating leasesare as follows:
Year Ending December 31Operating Leases(in thousands)2000$1,2022001855200260220035522004 and beyond985
4. ACQUISITIONS
Camworks, Inc.
On December 29, 1999, the Company merged with Camworks, Inc. ("Camworks"), an e-business solutions provider based in St. Paul, Minnesota. An aggregate of 1,000,000 shares of Company common stock were issued in exchange for all of the outstanding common stock of Camworks. Such shares were restricted as of December 31, 1999, pursuant to future registrations. The transaction was accounted for as a pooling-of-interests, and accordingly, the accompanying financial statements have been restated to include the financial position and the results of operations and cash flows of Camworks for all periods presented.
The results of operations of the combining companies for the last three yearsare as follows (in thousands):
Year Ending December 31,
Operating Leases
2003
$
944
2004
747
2005
388
Total
$
2,079
5. NOTE RECEIVABLE:
199919981997Net revenues:ZAMBA$25,495$8,121$5,620Camworks2,7811,237743$28,276$9,358$6,363199919981997Net income (loss):ZAMBA$(1,898)$(2,747)$(9,344)Camworks(109)(38)73$(2,007)$(2,785)$(9,271)As of December 31, 2001, we had a note receivable from a customer totaling $560,000. The note carried an interest rate of 12.0% per annum and was paid in 2002.
Merger6. NOTES RECEIVABLE - RELATED PARTIES:As of December 31, 2001, we had notes receivable - related
expensesparties totaling $310,000, representing amounts due from two employees. These notes were due in 2002, with interest at 9.0%, and were paid in 2002.7. RESTRUCTURING CHARGES AND NON-RECURRING ITEMS:
We incurred unusual charges in the first and second quarters of 2002 that, in the aggregate, were equivalent to approximately
$90,000.30% of our 2002 revenue. In the first quarter of 2002, we incurred unusual charges of $1.69 million for facility and employment matters, and in the second quarter of 2002, we incurred unusual charges of $1.64 million for facility and non-cash compensation matters. Included in the first quarter charges was a $1.34 million charge related to the leases for our Campbell, California, and Colorado Springs, Colorado, facilities, and included in the second quarter charges this amount was a $1.19 million charge for facility closings and lease termination costs. The
QuickSilver Group, Inc.
On September 22, 1998,second quarter facility charges included $190,000 for closing our Boston, Massachusetts facility, $290,000 for reducing theCompany completedamount of space we occupy in Minneapolis, Minnesota, and $713,000 for increasing theacquisitionaccrual for terminating our St. Paul, Minnesota and Campbell, California facilities to amounts consistent with buy-out offers made by our landlords. We subsequently reached termination agreements with our St. Paul and Campbell landlords. Upon completion of theQuickSilver Group, Inc.termination payments to our St. Paul and Campbell landlords during the third quarter of 2003, we expect to realize annual savings of approximately $2.8 million. We also incurred a $350,000 charge during the first quarter for severance pay relating to the reduction in headcount, including the separation of three vice presidents, which have resulted in annualized savings of approximately $3.5 million. The second quarter unusual charge also included a $443,000 non-cash compensation charge arising out of the exercise by Paul Edelhertz of his right to assign to us an aggregate of 250,000 shares of our common stock in exchange for our cancellation of a promissory note issued to us by Mr. Edelhertz bearing a principal balance of $500,000 and accrued interest through the date of cancellation of $43,250. This transaction relates to an agreement dated December 26, 2000, as amended on August 2, 2001. Mr. Edelhertz is a member of our board of directors and was our president and CEO from October 1998 through October 2000 and a vice president from August 1996 through October 1998.We also incurred restructuring and unusual charges in 2001 and 2000. We undertook a restructuring action in the second quarter of 2001, when we recorded a restructuring charge of $2.19 million. We made other headcount reductions in the third and fourth quarters of 2001. Our restructuring charge in the second quarter of 2001 was composed of $777,000 for severance payments, $123,000 for other employee-related costs (including continued medical benefits for the terminated employees),
("QuickSilver")$1.173 million for facility closings and other lease termination costs, $87,000 to resolve acustomer care consulting company specializingcontract dispute with a vendor, and $28,00039
of other related restructuring charges. No non-cash write-offs were incurred in connection with the restructuring charge. The facilities portion of the restructuring charge in the second quarter of 2001 includes new and additional lease termination costs and other expenses associated with our decisions to consolidate our operations and close unproductive or duplicative office locations in St. Paul, Minnesota and Pleasanton and Carlsbad, California.
Non-recurring charges of $753,000 were recorded in 2000. The items consist of severance expenses for senior management departures, costs associated with closing our St. Paul office in order to consolidate into an expanded, common Minneapolis facility, and the termination of a long-term software
package implementationsupport contract.Restructuring activities through December 31, 2002, were as follows:
Facility Closings
and Lease
Termination Costs
Severance and
Other Employee
Related Costs
Other
Total
Fourth Quarter 2000 Provision
$
240,000
$
307,000
$
206,000
$
753,000
2000 Utilized
—
(137,000
)
(206,000
)
(343,000
)
Balance as of December 31, 2000
240,000
170,000
—
410,000
Second Quarter 2001 Provision
1,173,000
900,000
115,000
2,188,000
Additional facility related accruals in
the fourth quarter of 2001
175,000
—
—
175,000
2001 Utilized
(786,000
)
(1,070,000
)
(115,000
)
(1,971,000
)
Balance as of December 31, 2001
802,000
—
—
802,000
First Quarter 2002 Provision
1,335,000
350,000
—
1,685,000
Second Quarter 2002 Provision
1,193,000
—
443,000
1,636,000
Additional severance related accruals in
the second quarter of 2002
—
100,000
—
100,000
2002 Utilized
(1,804,000
)
(315,000
)
(443,000
)
(2,562,000
)
Balance as of December 31, 2002
$
1,526,000
$
135,000
$
—
$
1,661,000
We expect to pay approximately $1.49 million of the balance in 2003, $85,000 in 2004 and $85,000 in 2005.
8. ACCOUNTS RECEIVABLE PURCHASE AGREEMENT:
On July 29, 2002, we entered into an Accounts Receivable Purchase Agreement with Silicon Valley Bank to replace a prior revolving credit facility we had established with Silicon Valley Bank. This agreement entitles us to borrow up to a maximum of $2.0 million based on eligible receivables, and is secured by virtually all of our assets. Borrowings under this agreement bear interest at a monthly rate of 1% of the average daily balance outstanding during the period. Additionally, on each reconciliation date, we pay an administrative fee equal to 0.25% of the face amount of each receivable purchased by Silicon Valley Bank during that reconciliation period. Although there are no financial covenants in the new agreement with Silicon Valley Bank, they may still declare default in certain circumstances, including our default under any leases or contracts. Our alleged default under a lease for
call center management, sales automation, marketing automation, and automated field service and sales. The acquisitionfurniture as set forth more fully in Note 17 isintended to be a tax-free reorganizationtechnically an “Event of Default” under theInternal Revenue CodeAccounts Receivable Purchase Agreement. Upon default, Silicon Valley Bank may elect from remedies including declaring all amounts paid to us under the agreement due and payable in full, or ceasing to buy receivables from us. Silicon Valley Bank has not elected to enforce this provision. If Silicon Valley Bank decides to enforce this provision, or otherwise does not purchase receivables from us, our ability to fund our operations could be materially harmed. This facility expires on July 29, 2003. The amount outstanding under this agreement was $298,000 at December 31, 2002.The Accounts Receivable Purchase Agreement replaced a secured revolving credit facility that we established with Silicon Valley Bank on February 27, 2001, and amended on August 2, 2001 and December 31, 2001. The secured revolving credit facility entitled us to borrow up to a maximum of
1986,$5.0 million based40
on eligible collateral. Borrowings under this line of credit bore interest at the bank’s prime rate plus 2.0%, and
for financial statement purposes has been recorded usingwere payable monthly. The amended agreement required, among other things, that we comply with minimum tangible net worth and profitability covenants. This facility was to expire on December 31, 2002, but was replaced by the Accounts Receivable Purchase Agreement. Amounts outstanding under the revolving credit facility were converted to being outstanding under the Accounts Receivable Purchase Agreement. We were in compliance with the covenants as of December 31, 2001. As of December 31, 2001, $1.1 million was outstanding under the line of credit.9. NOTE PAYABLE:
On November 5, 2002, we entered into a loan agreement with Entrx Corporation (“Entrx”), under which Entrx agreed to lend us up to $2.5 million in three separate advances. We received the first advance of $1 million in November 2002. On February 19, 2003, this loan agreement was amended. In connection with the amendment, we received the second advance of $750,000 but waived the third advance. Entrx also waived its rights to convert all outstanding advances into shares of our common stock, and terminated an option under the original agreement to purchase
methodadditional shares ofaccounting. Theour NextNet stock. Entrx also agreed to waive interest charges after December 2003.
31
consolidated financial statementsThe loan is in the form of a collateralized convertible note. The loan is collateralized with shares of NextNet Wireless, Inc. stock owned by us. The loan is not repayable in cash, but at Entrx’s option, may be repaid by conversion at any time into shares of our NextNet Wireless stock at a conversion price that is theCompany include the resultslesser ofQuickSilver since September 22, 1998. The$6.00 per share or such lower initial per share price (on a common share equivalent basis, without giving effect to differences in rights or to anti-dilution provisions or any other purchase priceconsists of the following:
(in thousands)Cash Paid$2,416Notes payable (see Note 5)2,162Equity Common Stock23Additional Paid in CapitalCommon Stock2,929Additional Paid in CapitalOptions Exchanged684Additional Paid in CapitalWarrants Exchanged579$8,793
The fair value of net tangible assets acquired was $1.09 million. The fair value of the identifiable intangible assets acquired was $7.70 million and was recordedadjustments set forth in thefollowing categories: peopleNextNet financing agreement) that NextNet agrees to receive for any sale of other preferred stock in an amount that is at least one million dollars ($1,000,000.00) before June 30, 2003. Interest on this note is computed at 8% andexperiences, client references, client lists,is payable monthly. Principal andintellectual property and delivery methodology.accrued interest underthis note will be converted to NextNet stock on or before March 31, 2003.
Proforma Results
The following table presentsEntrx also has theconsolidated resultsright to appoint one representative to become a member ofoperations for the Company for 1998 and 1997 on an unaudited pro forma basis as if the acquisition had taken place at the beginningour Board ofeach year:Directors.10. LONG-TERM DEBT:
Unaudited Pro Forma19981997(in thousands)Total revenue$15,148$12,273Net (loss)(7,988)(12,947)Net (loss) per sharebasic and diluted(0.28)(0.46)
5. NOTES PAYABLE AND LINE OF CREDIT:
As part ofthea 1998 acquisition of QuickSilver,the CompanyInc., we issued $2.16 million in promissory notes payable. Interest on the notes is computed at 7% to 10% of the outstanding balance and ispaiddue quarterly on the final day of each quarter, commencing December 31, 1999, and endingDecember 31, 2003.September 30, 2004. Principal payments are due quarterly,on the last day of each quarterin 16equal installments, commencing December 31, 1999.installments. Holders may requestconversion ofto convert their notes to our commonstock of ZAMBA.stock. Conversionwhichis computed at fair market value, and is at the sole and absolute discretion ofZAMBA'sour Board of Directors. No notes were converted to common stock during 2002, 2001 or 2000. During 1999,and 1998,$104,000and $1.02 millionof the principal value of the notes and $4,000and $19,000of accrued interest payable related to such notes were convertedtointo 46,119 shares of our commonstock, respectively.stock.
As part of the acquisitions of QuickSilver and Camworks, the CompanyWe also
acquiredhad debt related to loanobligations.obligations from other acquisitions. Loan paymentsarewere made monthly andconsistconsisted of principal and interest, whichiswas computed atarates ranging between6.00%8.5% and10.50%10.0%.OfThe remainder of these obligations$93,000 are payablewas paid in2000 and $60,000 are payable in 2001, $36,000 are payable in 2002 and $6,000 are payable in 2003.2002.
The Company also acquired debt related to third party obligations. Payments on these obligations are made monthly and consist of principal and interest. Interest on these obligations range from 9.59% to 20.21%. Of these third party obligations, $6,000 are payable in 2000.
In September of 1998, the Company purchased software for $300,000. Of this obligation, $150,000 is payable in September of 2000.
32
Aggregate annual maturities ofnotes payable,the long-term debt, subsequent to December 31,1999,2002, are as follows:
Year Ending December 31
Payments on Notes
(in thousands)
2003
$
266
2004
164
41
Year Ending December 31Payments on Notes(in thousands)2000$573200132020022962003200
Cash paidApproximately $423,000 of the remaining amount of this long-term debt is payable to one individual. On January 27, 2003, we entered into an agreement with this individual to terminate the debt owed to him in exchange forinterest charges were $32,000, $37,000a termination payment of $165,000 and$8,000a transfer of 16,667 shares of our Series A Preferred Stock in1999, 1998 and 1997, respectively.
NextNet. As a result, we will report an extraordinary gain on debt extinquishment ofDecember 31, 1999,approximately $187,000 in theCompanyfirst quarter of 2003. We will alsohad an available linereport a gain on sale ofcreditNextNet shares of$100,000$71,000 upon transfer ofwhich $0 was outstanding at year end.the shares to this individual.11. NEXTNET:
6. NEXTNET:
On September 21, 1998,the Companywe transferredits patented "NextNet"our “NextNet” wireless data technology to an entity now known as NextNet Wireless, Inc. (“NextNet”), and certain ofthe same name, in conjunction with the receipt by that entity of $8.0 million in private investment capital to fund the further development of the technology. The Company received forty-four percent (44%) ownership of the new company inour employees became NextNet employees. In exchange forthe technology. The Company's investmentthis technology, we received an equity stake in NextNetthe new company, isWireless. Our equity holdings are carried at $0the historical carrying basisbecause ofthe technology transferred, as amounts incurred by the Company upuncertainty surrounding our ability tothe date of the transfer were charged to research and development expense. The Company doesrealize value from them. We do not have anyobligationsobligation to provide further funding forthis investment.NextNet.NextNet is a private corporation that develops non-line-of-sight broadband wireless access platforms that provide telecommunications carriers with solutions for rapid deployment of high-speed, two-way voice and data services over the “last mile” of the communications network. Our chairman, Joseph B. Costello, is also the chairman of NextNet. Another of our directors, Dixon Doll, is also a director and a shareholder of NextNet. Additionally, another director of Zamba, Sven Wehrwein, is a consultant for NextNet. Except as described herein, there have been no other relationships or business transactions between the two companies since January 1, 2000.
In the second, third and fourth quarters of 2002, we entered into several transactions with private investors in which we sold portions of our equity holdings in NextNet for an aggregate total of $5.22 million. We have recognized a gain on sale our NextNet holdings in the amount of $5.20 million in 2002. As of December 31,
1999,2002, we have recorded $25,200 as a deferred gain on sale of investment. We will report theCompany's ownershipgain on sale of investment during the first quarter of 2003, when the shares are transferred to the private investors. Also, we have not yet received $46,000 from an agreed-to purchase of 7,667 of our shares of Series A Preferred Stock in NextNet.We initially sold a small portion of our shares of Series A Preferred Stock in NextNet for $3.00 per share, but most of our sales were at a price of $6.00 per share. We determined the sales price for our NextNet shares from various sources, including: a) discussions with potential investors, wireless telecommunications industry experts, investment bankers, and venture capitalists, b) looking at a proposed sale of NextNet stock, with similar rights as ours, that NextNet itself had considered immediately prior to our first sale to an outside investor, c) analyzing and comparing publicly held securities in related industries, d) considering our immediate cash needs, and e) the stage of development that NextNet was at as a company, at the time of the transactions. Another major factor in establishing the sales price was our determination of what an arms-length purchaser would pay for our NextNet shares. We had approached potential buyers of our NextNet shares since June 2001, but we were unable to find any interest, for many reasons including the facts that NextNet had not yet obtained any significant orders and investors were not interested in the telecommunications sector in general. On April 8, 2002, NextNet announced its first significant client, MVS Comunicaciones. Based on this announcement, some potential buyers became more interested in purchasing NextNet stock from us.
Based on our analysis, we determined that we would offer our NextNet shares at $6.00 per share. However, as we discussed in our Annual Report on Form 10-K, which we filed on April 1, 2002, we had only enough cash to meet our financial requirements through April 30, 2002. We therefore had an immediate desire to obtain approximately
35%.
7. STOCKHOLDERS' EQUITY:
$600,000 by mid-to-late April for payroll and other immediate cash needs. TheCompany'slarger potential investors included Imagine Capital Partners, The Rahn Group, Blake Capital and Wyncrest Capital, which eventually participated in both the first and second series of transactions. This group told us that they would not pay more than $3.00 per share if we wanted to raise money in such a short time frame. Other than several smaller participants in our first round, none of the other potential purchasers we had contacted indicated any interest in buying any of our NextNet shares at any price. Therefore, for our initial series of sales of NextNet stock, we agreed to sell 200,000 shares at42
$3.00 per share. Because Mr. Costello’s agreements to buy some of our NextNet shares, which were signed in February and March 2002, before any third party was willing to buy any of our NextNet stock, at any price, called for his shares to be valued at the per share price established upon our sale of any shares of our NextNet stock to any third party, the shares he purchased were then also valued at $3.00 per share. In the next two series of investments, we were able to offer more desirable and flexible payment terms, and therefore, we were able to sell 281,664 shares at $6.00 per share from late April to early June.
The first series of transactions occurred between April 10 and April 16, 2002, when we entered into stock purchase agreements with six private investors, in which the investors purchased an aggregate of 200,000 shares of our Series A Preferred Stock in NextNet. The investors paid us an aggregate amount of $600,000 for the shares, which were sold at a per share price of $3.00. As a result of this first series of transactions, the NextNet shares that we had agreed to sell to our chairman, Joseph B. Costello, pursuant to two earlier stock purchase agreements, one dated February 26, 2002, and amended on March 25, 2002, and the second dated March 25, 2002, were valued at $3.00 per share. As of March 31, 2002, Mr. Costello had paid us $700,000 pursuant to these two purchase agreements, which means that as a result of the $3.00 per share valuation, Mr. Costello received 233,333 of our NextNet shares.
The second series of transactions occurred between April 10 and April 30, 2002. During this second series, we entered into stock purchase agreements with seven private investors, in which we sold an aggregate of 229,997 shares of our Series A Preferred Stock in NextNet for an aggregate consideration of $1,380,000. Of this amount, $880,000 was received in April and $500,000 was received in May. All of the shares were sold at a per share price of $6.00. In connection with the second series of sales of NextNet shares in April 2002, we entered into stock purchase agreements with two private investors, pursuant to which we agreed to sell an aggregate of 133,332 shares of our Series A Preferred Stock in NextNet for an aggregate consideration of $800,000. Of this amount, $600,000 was received in September 2002 and $154,000 was received in October 2002, and remaining $46,000 is to be received at a later date. The price for these shares is also $6.00 per share. We recorded a deferred gain on sale of investment when we received the cash from these transactions, and a gain on sale of investment will be recorded when the shares are transferred to the private investors.
The third series of transactions occurred between May 29, 2002 and June 13, 2002. During this third series, we entered into stock purchase agreements with two private investors and three private investment funds managed by Dr. Doll, a director of our company and NextNet, in which we sold an aggregate of 51,667 shares of our Series A Preferred Stock in NextNet for an aggregate consideration of $310,000. Of this consideration, the entities managed by Dr. Doll purchased an aggregate of 25,000 of our NextNet shares for an aggregate consideration of $150,000. We received the cash for these shares in June. All of the shares were sold at a per share price of $6.00.
In the third quarter of 2002, we entered into stock purchase agreements with four private investors, in which we sold an aggregate of 30,002 shares of our Series A Preferred Stock in NextNet for an aggregate consideration of $180,012. We received the cash for these shares in August and September. All of the shares were sold at a per share price of $6.00. We recorded a deferred gain on sale of investment when we received the cash from these transactions, and a gain on sale of investment will be recorded when the shares are transferred to the private investors.
In addition to the above transactions, in order to make payroll and other critical vendor payments, Joseph B. Costello, our chairman, advanced $450,000 to us in June 2002, and $850,000 in July 2002. In consideration of these advances, our Board of Directors has agreed to transfer a total of 216,668 of our shares of NextNet Series A Preferred Stock valued at $6.00 per share.
In the fourth quarter of 2002, we entered into stock purchase agreements with two private investors, in which we sold an aggregate of 4,200 shares of our Series A Preferred Stock in NextNet for an aggregate consideration of $25,200. All of the shares were sold at a per share price of $6.00. We recorded a deferred gain on sale of investment when we received the cash from these transactions, and a gain on sale of investment will be recorded when the shares are transferred to the private investors.
43
All of the NextNet shares that we sell, including those sold to Mr. Costello, are subject to the right of first refusal on the parts of NextNet and the holders of the Series B Preferred Stock of NextNet.
A summary of our NextNet investment activity is as follows:
Series A
Preferred Stock
Cash
Received
Balance as of December 31, 2001 and 2000
2,400,000
Shares sold at $3.00 per share in 2002 to related parties
233,333
$
700,000
Shares sold at $3.00 per share in 2002 to other investors
200,000
600,000
Shares sold at $6.00 per share in 2002 to related parties
241,666
1,450,000
Shares sold at $6.00 per share in 2002 to other investors
416,533
2,499,000
Referral fees paid in 2002
(25,000
)
Totals for 2002
1,091,532
$
5,224,000
Balance as of December 31, 2002
1,308,468
As of December 31, 2002, our remaining ownership of Series A Preferred Stock in NextNet, represents approximately 12% of the equity in NextNet. Of our remaining shares, we have placed an aggregate of 583,333 in an escrow account as collateral for our loan from Entrx Corporation. See Note 9 for further discussion regarding the loan from Entrx.
As described in Note 10, on January 27, 2003, we entered into an agreement to terminate debt owed to an individual. As a part of this debt extinquishment, we agreed to transfer 16,667 shares of our Series A Preferred Stock in NextNet to this individual.
On February 17, 2003, we entered into stock purchase agreements with two private investors which resulted in our transferring to them approximately 177,000 shares of our Series A Preferred Stock in NextNet for a total of $750,000. In connection with this sale, we issued a warrant to an investor affiliated with a prior purchaser of NextNet shares from us to purchase 125,000 additional shares of our Series A Preferred Stock in NextNet from us at $6.00 per share, any time prior to the close of business on May 17, 2004.
12. STOCKHOLDERS’ EQUITY:
Our stock incentive and non-qualified option plans provide for grants of stock options and stock awards. The number of common shares available for grant pursuant to the plans
were 1,763,406, 3,107,226,was 6,244,603, 3,508,045, and621,7532,948,590, as of December 31,1999, 19982002, 2001 and1997,2000, respectively.
Options become exercisable over periods of up to four years from the date of grant and expire within ten years from date ofgrant.grant.
33
The following table details option activity:44
OptionsPrice PerOptionWeighted AverageExercise PriceBalances, December 31, 19962,911,6720.10-12.6253.04Granted2,078,5721.50-4.31252.37Exercised(255,265)0.20-3.881.16Canceled(1,284,714)0.10-12.6255.06Balances, December 31, 19973,450,2650.20-12.6252.69Granted6,061,4921.50-4.3251.93Exercised(143,330)0.20-3.251.38Canceled(3,090,228)1.50-7.252.75Balances, December 31, 19986,278,199$ 0.20-12.6251.83Granted3,283,9501.563-11.2973.06Exercised(497,520)0.29-3.751.47Canceled(1,283,484)0.42-5.001.87Balances, December 31, 19997,781,145$ 0.20-12.6252.44Options exercisable at December 31, 19992,851,249$ 0.20-12.625$2.06
Options
Price Per
Option
Weighted
Average
Exercise Price
Balances, December 31, 1999
7,781,145
0.2000 - 12.6250
2.44
Granted
6,381,391
2.5312 - 20.1250
5.21
Exercised
(962,543
)
0.2000 - 2.6875
1.50
Canceled
(1,516,124
)
0.4200 - 20.1250
6.82
Balances, December 31, 2000
11,683,869
0.2000 - 20.1250
3.50
Granted
2,781,147
0.3400 - 3.7500
1.55
Exercised
(186,425
)
0.2000 - 2.1250
0.30
Canceled
(3,390,477
)
0.9900 - 20.1250
3.73
Balances, December 31, 2001
10,888,114
0.3400 - 20.1250
2.90
Granted
6,908,843
0.1000 - 0.7000
0.21
Exercised
(30,018
)
0.4200 - 0.4200
0.42
Canceled
(7,658,324
)
0.1500 - 20.1250
2.38
Balances, December 31, 2002
10,108,615
0.1000 - 20.1250
1.46
Options exercisable at December 31, 2002
4,620,028
$
0.1500 - $20.1250
$
2.50
On October 13, 1998, the Company repriced outstanding stock options held by an officer to the market value of the Company's stock as of October 13, 1998. In connection with the repricing of outstanding stock options, all repriced options started vesting on October 13, 1998, and become exercisable over periods of up to four years from October 13, 1998. A total of 500,000 options, with an original exercise price of $3.25, were repriced to $1.75.
On January 20, 1998, the Company repriced outstanding stock options held by officers to the market value of the Company's stock as of January 20, 1998. In connection with the repricing of outstanding stock options, all repriced options started vesting on January 20, 1998, and become exercisable over periods of up to four years from January 20, 1998. A combined total of 400,000 options, with original exercise prices ranging from $3.00 to $3.9375, were repriced to $2.00
On October 20, 1997, the Company repriced outstanding stock options held by employees to the market value of the Company's stock as of October 20, 1997. In connection with the repricing of outstanding stock options, all repriced options started vesting on October 20, 1997, and become exercisable over periods of up to four years from October 20, 1997. Approximately 293,000 options, with original exercise prices ranging from $2.25 to $12.625, were repriced to $1.50.
No compensation cost has been recognized for stock options granted to employees or directors undertheour 1989 Stock Option Plan,the1993 Equity Incentive Plan, 1993 Directors Option Plan,the 1998 Non-Officers Plan, the1997 Stock Option Plan,or the1998 Non-Officers Plan, 1999 Non-Officers Plan,for Key Employees, Consultants and Directors of QuickSilver Group, Inc.2000 Non-Officers Plan, or 2000 Non-Qualified Plan (collectively referred to as"the Plans"the “Plans”). Had compensation cost for the Plans been determined based on the fair value of options at the grant date for awards in1999, 1998
34
2002, 2001, and
1997, the Company's2000, our net loss and net loss per share would have increased to the pro forma amounts indicated below:
199919981997(
In thousands, except per share amounts)Net lossAs reported$(2,007)$(2,785)$(9,271)Pro forma(4,545)(5,020)(10,435)Net loss per shareAs reported(.07)(.10)(.36)Basic and dilutedPro forma(.15)(.20)(.40)
The pro forma effect on the net loss for 1999, 1998 and 1997 is not fully representative of the pro forma affect on net earnings (loss) in future years because these years do not take into consideration pro forma compensation expense related to grants made prior to 1995.Inrelation to the option repricing described previously, the above proforma compensation expense includes $120,000 and $37,000, for 1998 and 1997, respectively.thousands, except per share amounts)
2002
2001
2000
Net loss
As reported
$
(6,613
)
$
(9,529
)
$
(2,676
)
Pro forma
(14,214
)
(19,131
)
(9,004
)
Net loss per share -
As reported
(0.17
)
(0.28
)
(0.08
)
Basic and diluted
Pro forma
(0.37
)
(0.57
)
(0.29
)
The aggregate fair value of options granted during
1999, 19982002, 2001, and1997,2000, respectively, was$3.35$603,000, $150,000, and $8.37 million$3.53 million, and $881,000for the 1993 Equity Incentive Plan,$163,000 $47,000,$17,000, $69,000, and$193,000$1.90 million for the 1993 Directors Option Plan,$3.10$94,000, $0, and $1.85 million,$687,000 and $0for the 1998 Non-Officer Option Plan, $14,000, $0,$351,000and $5.04 million, for the 1999 Non-Officer Plan, $0, $446,000, and $6.51 million, for the 2000 Non-Officer Plan, and $476,000, $2.76 million, and $5.71 million, for the 2000 Non-Qualified Option Plan. No options were granted in 2002, 2001, and 2000 for the 1997 Stock Option Plan for Key Employees, Consultants and Directors of QuickSilver Group, Inc.and $2.58 million, $0 and $0 for the 1999 Non-Officer Plan.The aggregate fair value was calculated by using the fair value of each option grant on the date of grant, utilizing the Black-Scholes option-pricing model and the following key assumptions for the Plans:
Assumptions199919981997Risk-free interest rates4.59%-6.30%4.18%-5.71%5.27%-6.77%Volatility112%79%36%Expected lives (months)606060
Assumptions
2002
2001
2000
Risk-free interest rates
3.02%-4.84
3.96%-5.13
5.52%-6.76
Volatility
124
%
115
%
133
%
Expected lives (months)
60
60
60
The following table summarizes information about fixed-price stock options outstanding at December 31,
1999:2002:45
Options Outstanding
Options Exercisable
Range of
Exercise
Prices
Number
Outstanding at
December 31, 2002
Weighted- Average
Remaining
Contractual Life
Weighted-
Average
Exercise
Price
Number
Exercisable at
December 31,
2002
Weighted-
Average
Exercise Price
$
0.10- $0.15
4,356,750
9.65
$
0.15
333,815
$
0.15
0.29- 0.99
1,011,152
8.95
0.42
174,449
0.74
1.00- 1.99
1,687,877
7.18
1.57
1,561,252
1.60
2.00- 5.00
2,490,748
6.66
2.85
2,170,493
2.79
5.03- 20.13
562,088
7.13
6.95
380,019
7.50
Totals
10,108,615
4,620,028
Options OutstandingOptions ExercisableRange ofExercise PricesNumber Outstandingat December 31, 1999Weighted-AverageRemainingContractual LifeWeighted-AverageExercise PriceNumber Exercisableat December 31, 1999Weighted-AverageExercise Price$0.20-.84529,7284.94$0.41477,836$0.371.50-2.385,352,6478.421.861,643,3931.772.44-3.881,099,3867.952.95416,0483.034.12-5.50396,2847.024.76304,9724.766.00-12.63403,1009.839.169,0009.90
35
Stock-Based Compensation:
Non-cash compensation charges consist mainly of expenses associated with Camworks stockWe grantedto Camworks employees' prior to the merger under pre-existing change of control provisions within these employment agreements. These stock grants represented a one-time charge to 1999 earnings of $325,000. The Company also granted 161,700213,000 stock options to non-shareholder employees of Camworkssubsequent to the Company's merger with Camworks.and Fusion following our acquisition of these companies. The options were granted with an exercise price less than fair market value asa means of incenting thean incentive to employees to continue employment withZamba. Deferredus. Non-cash compensation charges were $25,000, $237,000 and $248,000 for the years ended December 31, 2002, 2001, and 2000. The remaining deferred compensation related to these options is$1.1 million,$11,000, and will be recognizedoverin 2003 (remainder of thefour yearfour-year vestingperiod,period), based upon the intrinsic value method in accordance with APB No. 25.Preferred Stock:
The Company's certificateOur Fifth Amended and Restated Certificate ofincorporationIncorporation authorizes issuance of up to 5.0 million preferred shares with a par value of $0.01 per share and allowsthe Company'sour Board of Directors, without obtainingthe stockholders'stockholder approval, to issue such preferred stock.In October 1998, 1.0 million shares of preferred stock were purchased by the chairman of the Board of Directors of the Company for $2.00 per share. These shares converted by their terms to common stock on December 29, 1998.There were no preferred shares issued or outstanding as of December 31,19992002, 2001, or1998.2000.Warrants:
We sold some of our common stock on three occasions during the first quarter of 2002. In connection with each of these sales or group of sales, we issued warrants to purchase additional shares of our common stock to the purchasers. The first sale occurred on January 31, 2002, when Joe Costello, our chairman, purchased an aggregate 626,504 shares of our common stock from us in a private transaction at a purchase price of $0.479 per share, for an aggregate consideration of $300,000. In connection with Mr. Costello’s purchase, we issued him a warrant to purchase up to 313,252 shares of our common stock. This warrant may be exercised at a per share purchase price of $0.599 at any time through the close of business on January 31, 2007. The shares were issued at 90% of the average closing bid price for our common stock for the twenty trading days prior to the date of issuance, and the exercise price for the warrant was set at 125% of the per share price for the common stock purchased by Mr. Costello. The fair value of the warrant is $105,000, which is included as part of additional paid-in capital.
On February 1, 2002, we sold an aggregate of 793,383 shares of our common stock at a purchase price of $0.479 per share to a group of seven individual investors in private transactions, for a total consideration of $380,000. The purchase price is equal to 90% of the average closing bid prices of our common stock for the twenty business days prior to February 1, 2002. In connection with this transaction, we also issued warrants to the individuals in this group that entitles them to purchase up to an aggregate of 396,691 shares of our common stock, at an exercise price of $0.599 per share. These warrants may be exercised at any time through the close of business on February 1, 2007. The warrant exercise price represents 125% of the average closing bid prices of our common stock for the twenty business days prior to February 1, 2002. The aggregate fair value of the warrant is $130,000, which is included as part of additional paid-in capital.
On February 22, 2002, in connection with a Strategic Alliance Agreement with HCL Technologies America, Inc. (“HCL America”) and HCL Technologies Limited, India (“HCL”), HCL America purchased an aggregate of 2,460,025 shares of our common stock from us in a private transaction, for an aggregate consideration of $1,000,000, and we issued HCL America a warrant to purchase up to 615,006 shares of our common stock. This warrant may be exercised at a per share purchase price of $0.61 at any time through the close of business on February 21, 2007. The shares were issued at the average closing bid price for our common stock for the twenty trading days preceding the date of the agreement, and the exercise
46
Warrants:
price for the warrant was set at 150% of the per share price for the common stock purchased by HCL America. As a result of the purchase of our shares and the issuance of the warrant, HCL America and HCL, as the parent company of HCL America, are now jointly beneficial owners of more than 5% of our outstanding common stock. The fair value of the warrant is $142,000, which is included as part of additional paid-in capital.The fair value of the above warrants were calculated by utilizing the Black-Scholes option-pricing model and the following key assumptions:
January 31, 2002
Warrant
February 1, 2002
Warrant
February 22, 2002
Warrant
Risk-free interest rate
4.40
%
4.40
%
4.27
%
Volatility
108
%
108
%
108
%
Expected life (months)
60
60
60
We also issued warrants to purchase shares of our common stock to Mr. Costello and Silicon Valley Bank in 2001. On June 29, 2001, we sold 2,352,942 shares of our common stock at the average closing bid price of our common stock for the five trading days prior to the date of issuance, to Joseph B. Costello, our current Chairman, for $2.0 million. In connection with this transaction, we also issued a warrant to Mr. Costello that entitles him to purchase up to 1,176,471 shares of our common stock, at an exercise price of $1.0625 per share. The warrant exercise price represents 125% of the per share price of our common stock on the date of issuance. The fair value of the warrant is $809,000, which is included as part of additional paid-in capital. The fair value of the warrant was calculated by utilizing the Black-Scholes option-pricing model and the following key assumptions:
Assumptions:
Risk-free interest rate
4.69
%
Volatility
111
%
Expected life (months)
48
On February 27, 2001, as amended on August 2, 2001 and December 31, 2001, we established a secured revolving credit facility with Silicon Valley Bank that allows us to borrow up to a maximum of $5.0 million based on our eligible accounts receivable. The amended agreement requires, among other things, that we comply with minimum tangible net worth and profitability covenants. We issued warrants to Silicon Valley Bank upon the establishment of the loan agreement and upon each of its amendments. In connection with the
acquisitionestablishment ofQuickSilver stock warrantsthe credit facility, we issued a warrant to purchaseQuickSilver35,000 shares of our common stockwere convertedat an exercise price of $2.80 per share to462,247 warrantsSilicon Valley Bank. The fair value of the warrant issued upon establishment of the credit facility was $62,000. As part of the August 2, 2001 amendment, we issued a warrant to Silicon Valley Bank to purchaseZAMBAan additional 35,000 shares of our commonstock. Thesestock at an exercise price of $0.86 per share. The fair value of the warrant issued upon the August 2001 amendment is $23,000. As part of the December 31, 2001 amendment, we issued a warrant to Silicon Valley Bank to purchase an additional 20,000 shares of our common stock at an exercise price of $0.51 per share. The fair value of the warrant issued upon the December 2001 amendment is $10,000. The exercise price for each warrant was established by averaging the closing price of our common stock for the five trading days prior to the date of issuance, and each warrant expires five years from the date of issuance. The remaining fair value of the warrants is being charged to interest expense over the life of the credit facility, which expires on December 31, 2002. The aggregate fair value for the additional interest cost for the warrants granted in connection with the February 27, 2001 establishment of the credit facility and the August 2, 2001 and December 31, 2001 amendments, wereexercised during 1999. Nocalculated by using the fair value of the warrant on the date of grant, utilizing the Black-Scholes option-pricing model and the following key assumptions:
February 27, 2001
Warrant
August 2, 2001
Warrant
December 31, 2001
Warrant
Risk-free interest rate
4.80
%
4.54
%
4.42
%
Volatility
83
%
102
%
107
%
Expected life (months)
48
60
60
47
Except for the warrants described above, no other warrants
rightsareoutstanding.outstanding as of December 31, 2002 or 2001.A summary of the warrants outstanding at December 31, 2002 is as follows:
Date
Warrants
Issued
Date
Warrants
Expire
Number of
Warrants
Issued
Exercise
Price of
Warrants
Joe Costello
June 29, 2001
June 29, 2007
1,176,471
$
1.063
HCL America
February 22, 2002
February 21, 2007
615,006
$
0.610
Group of seven individual investors
February 1, 2002
February 1, 2007
396,691
$
0.599
Joe Costello
January 31, 2002
January 31, 2007
313,252
$
0.599
Silicon Valley Bank
February 27, 2001
February 26, 2006
35,000
$
2.800
Silicon Valley Bank
August 2, 2001
August 1, 2006
35,000
$
0.860
Silicon Valley Bank
December 31, 2001
December 30, 2006
20,000
$
0.510
Total
2,591,420
Stockholder Rights Plan:
On September 7, 1994,theour Board of Directors adopted a Stockholder RightsPlan.Plan (the “Plan”). Under this plan, the Board of Directors declared a dividend of one preferred share purchase right (a"Right"“Right”) for each share of common stock outstanding as of September 28, 1994 (the"Record Date"“Record Date”). In addition, one Right will be issued with each share of common stock that becomes outstanding after the Record Date, except in certain circumstances. All Rights will expire on September 12, 2004, unlessthe Company extendswe extend the expiration date,redeemsredeem the Rights orexchangesexchange the Rights for common stock. Our Board of Directors amended the Plan on January 29, 2002, and November 26, 2002.
The Rights are initially attached to
the Company's Common Stockour common stock and will not trade separately. If a person or a group acquires 20 percent or more ofthe Company'sour common stock (an"Acquiring Person"“Acquiring Person”) or announces an intention to make a tender offer for 20 percent or more ofthe Company'sour common stock, then the Rights will be distributed (the"Distribution Date"“Distribution Date”) and will thereafter trade separately from the common stock. Upon the Distribution Date, each Right may be exercised for 1/100th of a share of a newly designated Series A Junior Participating Preferred Stock at an exercise price of$25.00.$25.00 per share. In the January 29 amendment, our Board of Directors revised the definition of Acquiring Person to exclude our Chairman, Joseph B. Costello (“Costello”) or any person who, following the death of Costello, acquires his shares pursuant to a last will and testament or pursuant to the laws of descent and distribution applicable to his estate, unless Costello, or any person acquiring his shares in the manner described above, becomes the beneficial owner of 49.99% or more of our common shares then outstanding. In the November 26 amendment, our Board of Directors revised the definition of Acquiring Person to exclude Entrx Corporation if it acquires any of our shares with respect to or on its conversion of the Convertible Secured Promissory Note, dated November 4, 2002, we issued to it, unless Entrx or any of its “Affiliates” or “Associates” becomes the beneficial owner of 39.99% or more of our common shares then outstanding.
Upon a person or group becoming an Acquiring Person, holders of the Rights (other than the Acquiring Person) will have the right to acquire shares of
the Company'sour common stock at a substantially discounted price in lieu of the preferred stock. Additionally, if, after the Distribution Date,the Company mergeswe merge into orengagesengage in certain other business combination transactions with an Acquiring Person or 50 percent or more ofitsour assets are sold in a transaction with an Acquiring Person, the holders of Rights (other than the Acquiring Person) will have the right to receive shares of common stock of the acquiring corporation at a substantially discounted price.
36
After a person or a group has become an Acquiring Person,the Company'sour Board of Directors may, at its option, require the exchange of outstanding Rights (other than those held by the Acquiring Person) for common stock at an exchange ratio of one share ofthe Company'sour common stock per Right. TheboardBoard also has the right to48
redeem outstanding Rights at any time prior to the Distribution Date (or later in certain circumstances) at a price of $0.005 per Right. The terms of the Rights, including the period to redeem the Rights, may be amended by
the Company'sour Board of Directors in certain circumstances.Employee Stock Purchase Plan:
As of July 1, 2000, our Board of Directors adopted a non-compensatory Employee Stock Purchase Plan (the “ESPP”). Under the ESPP, employees who elect to participate may purchase common stock at a 15% discount from the market value of such stock. The ESPP permits an enrolled employee to make contributions to purchase shares of common stock by having from 1%-10% of their compensation withheld from each payroll, up to a maximum of $6,250 each quarter. The total number of shares that may be issued pursuant to options granted under the ESPP is 750,000. Approximately 156,000 shares were issued under the ESPP at an average price of $0.22 per share in 2002, approximately 303,000 shares were issued under the ESPP at an average price of $0.86 per share in 2001, and approximately 92,000 shares were issued under the ESPP at an average price of $2.76 per share in 2000. Approximately 199,000 shares remain available for issuance under this ESPP at December 31, 2002.
8.13. INCOME TAXES:
The Company hasWe have incurred net operating losses since
inception.our inception in 1990. Because of the uncertainty about whetherthe Companywe will have taxable earnings in the future,the Company haswe have not reflected any benefit of such net operating loss carryforwards in the accompanying consolidated financial statements.
AtAs of December 31,
1999, the Company has2002, we have approximately$69.9$87 million of net operating loss carryforwards for both financial statement and for federal income tax purposes that begin to expire in 2005. The use of these carryforwards in anyone-year isone year may be limited under Internal Revenue Code Section 382because ofdue to significant ownership changes. In addition, the net operating loss carryforward of QuickSilver is limited under the federal consolidated tax return rules.
The provision for income taxes differs from the expected tax benefit, computed by applying the federal corporate tax rate of 34%, as
follow:follows:
19991998Expected federal benefit$(683,000)$(934,000)Change in valuation allowance(752,000)1,649,000State taxes, net764,000(165,000)Subsidiary net operating loss acquired(860,000)Amortization1,276,000375,000Stock compensation(563,000)Other(42,000)(65,000)Total benefit$$
2002
2001
Expected federal benefit
$
(2,200,000
)
$
(2,710,000
)
Change in valuation allowance
2,500,000
3,160,000
State taxes, net
(300,000
)
(450,000
)
Amortization
—
75,000
Stock compensation
—
(35,000
)
Other
—
(40,000
)
Total benefit
$
—
$
—
Valuation allowances have been established for the entire tax benefit associated with the carryforwards and net future deductible temporary differences as of December 31,
1999, 19982002 and1997.2001.
The tax effect of items that comprise a significant portion of deferred tax assets is:
49
19991998Deferred tax assets:Net operating loss carryforwards$27,354,000$28,328,000Tax credits720,000670,000Other, principally depreciation and amortization676,000504,000Valuation allowance(28,750,000)(29,502,000)Net deferred tax asset$$
2002
2001
Deferred tax assets:
Net operating loss carry forwards
$
33,900,000
$
31,400,000
Tax credits
750,000
750,000
Other, principally depreciation and amortization
785,000
785,000
Valuation allowance
(35,435,000
)
(32,935,000
)
Net deferred tax asset
$
—
$
—
Due to the uncertainty surrounding the timing of realizing the benefits of its favorable tax attributes in future tax returns, the Company has placed a valuation allowance against its otherwise recognizable deferred tax assets.
37
9.14. EMPLOYEE SAVINGSPLAN:PLAN:
The Company offersWe offer a Section 401(k) defined contribution benefit plan for which all regular employees are eligible. Participants may contribute up to 20% of their compensation in any plan year subject to an annual limitation.
Employer contributionsWe maybe mademake an employer contribution to the 401(k) plan at the discretion ofthe Company'sour Board of Directors.No CompanyWe have not made any employer contributionshave been madeto thePlan.401(k) plan to date.
10.15. MAJORCUSTOMER:CUSTOMERS:
A portion of
the Company'sour revenues have been derived fromasignificantcustomercustomers for the years ended December 31,1999, 19982002, 2001 and19972000 as follows:
199919981997Customer 16%16%6%
2002
2001
2000
Customer 1
19
%
12
%
16
%
Customer 2
14
%
4
%
0
%
Customer 3
11
%
10
%
2
%
Customer 4
11
%
8
%
0
%
Customer 5
0
%
10
%
7
%
11.16. FAIR VALUE OF FINANCIALINSTRUMENTSINSTRUMENTS:
The carrying amount for cash and cash equivalents
short-term investmentsand long-term debt approximates fair value because of the short maturity of those instruments.17. LITIGATION:
12. SUBSEQUENT EVENT:
We are subject to various legal proceedings and claims that arise in the ordinary course of business. The following is a summary of our current legal proceedings.On
January 7, 2000,August 5, 2002, our former president and CEO, Doug Holden, notified us that he believes we breached his severance agreement with us following theCompany mergedseparation of his employment. Mr. Holden has requested continued payroll and benefits and continued vesting of stock options for six months from June 27, 2002, the date of his separation. Mr. Holden’s annualized salary at the time of his separation was $240,000. Mr. Holden has requested approximately $120,000 to settle this matter, plus the value of his benefits and continued vesting of his options. We believe that we have valid defenses to Mr. Holden’s claims and/or that Mr. Holden is not entitled to the items he is requesting. The timing and ultimate resolution of Mr. Holden’s claims are uncertain at this time.50
We are also subject to other various legal proceedings and claims that we do not believe are material either separately or in the aggregate.
In addition to these matters, we settled other actual or threatened legal proceedings during 2002. These settlements were discussed in our quarterly reports on Form 10-Q for the quarters ended June 30 and September 30, 2002. The settlements discussed in the September 30 quarterly report include the items described below.
On March 13, 2003, we reached an agreement with
Fusion, Inc. ("Fusion"Key Equipment Finance, to terminate our lease for office furniture and settle related litigation. Under the agreement, we will pay a total of $145,000 in various installment payments from the settlement date through December 2003. Key had previously filed a complaint against us in Hennepin County District Court in Minneapolis, Minnesota alleging that we had breached leases for office furniture. This lawsuit was dismissed with prejudice in connection with the settlement.On October 10, 2002, we reached an agreement with Army Corps Operating Associates (“Army Corps”), to terminate our lease for a
Colorado Springs, Colorado based consulting firm specializingfacility infront officeSt. Paul, Minnesota, andcontact center customer care solutions. The Company issued 80,001 sharessettle related litigation. Under the termination and release for this facility, we will pay a total ofits common stock$500,000 in various installment payments from October 2002 through September 2003. As of December 31, 2002, we have paid $135,000 of the settlement amount and the remaining $365,000 is included in accrued expenses on the balance sheet.On October 10, 2002, we reached an agreement with WTA Campbell Technology Park LLC (“WTA”), to terminate our lease for a facility in Campbell, California, and settle related litigation. Under the termination and release for this facility, we will pay a total of $729,000 in various installment payments from October 2002 through August 2003. As of December 31, 2002, we have paid $216,000 of the settlement amount and and remaining $513,000 is included in accrued expenses on the balance sheet.
On September 27, 2002, we entered into a settlement agreement with a furniture lessor, Fidelity Equipment Leasing, that had threatened to bring an action against us for an alleged breach of five equipment leases. We agreed to pay a total of $120,000 from September 2002 through April 2003 in exchange for
alltermination of theoutstanding common stocklease and a release ofFusion,Fidelity’s claims. As of December 31, 2002, we have paid $60,000 of the settlement amount and themergerremaining $60,000 is included in accrued expenses on the balance sheet.18. SUBSEQUENT EVENTS:
On January 27, 2003, we entered into an agreement with Todd Fitzwater, in which we paid $165,000 and transferred 16,667 shares of our Series A Preferred Stock in NextNet, in exchange for a termination of the remaining debt obligation, as described in Note 10. The amount owed Mr. Fitzwater was
accountedapproximately $423,000 at December 31, 2002. As a result, we will report an extraordinary gain on debt extinquishment of approximately $187,000 in the first quarter of 2003. We will also report a gain on sale of NextNet shares of $71,000 upon transfer of the shares to Mr. Fitzwater.On February 17, 2003, we entered into stock purchase agreements with two private investors, which resulted in our transferring to them approximately 177,000 shares of our Series A Preferred Stock in NextNet for
asapooling-of-interests. Fusion had unaudited revenuetotal of$1.0 million in 1999 and $62,000 in 1998, and unaudited net income of $138,000 in 1999 and $3,000 in 1998.
$750,000. In connection withthe merger agreement, the Company granted Fusion non-shareholder employeesthis sale, we issued atotalwarrant to an investor affiliated with a prior purchaser of43,800 optionsNextNet shares from us to purchase 125,000 additional shares ofZAMBAour Series A Preferred Stock in NextNet from us at $6.00 per share, any time prior to the close of business on May 17, 2004.On February 19, 2003, the loan agreement with Entrx, as described in Note 9, was amended. The second advance of $750,000 was paid in the first quarter of 2003 and the obligation of Entrx to pay the third installment of $750,000 was waived. Entrx also waived its rights to convert all outstanding advances into shares of our common stock,
at an exercise price below the then current fair market value. This grant will result in a chargeterminated its option to purchase additional shares of$87,600our NextNet stock, andwill be amortized over the four-year option vesting period. Merger related expenses were approximately $25,000.agreed to waive interest charges that might otherwise accrue after December 2003.51
38Zamba Corporation
ZAMBA Corporation
SCHEDULE IIValuation and Qualifying Accounts
(in thousands)
Column A
Column B
Column C
Column D
Column E
Description
Balance at
Beginning of
Period
Additions
Charged to
Expense
Deductions
from
Allowance
Balance at
End of
Period
Year ended December 31, 2002
Allowance for doubtful accounts (deducted from accounts receivable)
$
183
$
20
$
(59
)
$
144
Year ended December 31, 2001
Allowance for doubtful accounts (deducted from accounts receivable)
429
275
(521
)
183
Year ended December 31,2000
Allowance for doubtful accounts (deducted from accounts receivable)
309
965
(845
)
429
52
SIGNATURES
(In thousands)
Column AColumn BColumn CColumn DColumn EDescriptionBalance atBeginning ofPeriodAdditionsCharged toExpenseDeductionsfromAllowanceBalance atEnd ofPeriodYear ended December 31, 1999Allowance for doubtful accounts (deducted from accounts receivable)$241$133$(98)$276Year ended December 31, 1998Allowance for doubtful accounts (deducted from accounts receivable)23813(10)241Year ended December 31, 1997Allowance for doubtful accounts (deducted from accounts receivable)354118(234)238Inventory obsolescence reserve (deducted from inventories)856207(1,063)0
39
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ZAMBA CORPORATION
Date: March
8, 200031, 2003By
By/s/PAUL/s/ Norman D.
EDELHERTZPaulSmithNorman D.
Edelhertz,
SmithPresident and Chief Executive Officer
Each person whose signature appears below constitutes and appoints
Paul EdelhertzNorman D. Smith and Michael H. Carrel, jointly and severally, his true and lawful attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to signamendments tothis Annual Report on Form 10-K and any amendments thereto, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name
Name
TitleDate
TitleDatePRINCIPAL EXECUTIVE OFFICER:/s/PAUL/s/ Norman D.
EDELHERTZPaul D. EdelhertzSmithPresident and Chief
March 31, 2003
Norman D. Smith
Executive Officer (Principal
March 8, 2000PRINCIPAL FINANCIAL OFFICERExecutive Officer)
/s/MICHAEL H. CARREL/s/ Michael H. Carrel
Executive Vice President
March 31, 2003
Michael H. Carrel
and Chief Financial Officer
March 8, 2000(Principal Financial and
Accounting Officer)
OTHER DIRECTORS:
/s/JOSEPH B. COSTELLO/s/ Joseph B. Costello
Chairman of the Board
March
31, 20038, 2000/s/DIXON R. DOLLJoseph B. Costello
/s/ Dixon R. Doll
Director
March
31, 20038, 2000Dixon R. Doll
40
/s/MICHAEL/s/ Paul D. Edelhertz
Director
March 31, 2003
Paul D. Edelhertz
/s/ Sven A.
FABIASCHIMichael A. FabiaschiWehrweinDirector
March
31, 20038, 2000/s/SVEN WEHRWEINSven
A.WehrweinWehrweinDirectorMarch 8, 200053
41
I, Norman D. Smith, certify that:
ANNUAL MEETING
The ZAMBA Corporation annual stockholders' meeting will be held at the Radisson Plaza Hotel, 35 South Seventh Street, Minneapolis, Minnesota, 55402, at 3:00 p.m. C.S.T. on Thursday, May 18, 2000.
SHAREHOLDER INFORMATION
ZAMBA common stock trades on the Nasdaq National Market under the symbol ZMBA. Stockholders and prospective investors are welcome to call, write or fax ZAMBA with questions or requests for additional information. Copies of ZAMBA's1. I have reviewed this Annual Report on Form 10-K of Zamba Corporation;2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
year ended December 31, 1999, may be obtained without chargeperiods presented in this annual report;4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
directing inquiries to:others within those entities, particularly during the period in which this annual report is being prepared;
ZAMBA CorporationInvestor Relations7301 Ohms Lane, Suite 200Minneapolis, MN 55439Tel: 612-832-9800Fax: 612-832-9383Website:http:\\www.ZAMBAsolutions.comTransfer AgentNorwest Bank Minnesota, N.A.Stock Transfer Department161 North Concord ExchangeP.O. Box 738South St. Paul, MN 55075-0738Tel: 612-450-4101Fax: 612-450-4078Independent AuditorsKPMG LLPMinneapolis, MNDirectorsJoseph B. CostelloChairman of the BoardZAMBA CorporationChairmanb) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date:
March 31, 2003
/s/ Norman D. Smith
Chief Executive Officer
think3Paul D. EdelhertzPresident and Chief Executive OfficerZAMBA CorporationDixon R. DollFounder and ChairmanDoll Capital ManagementMichael A. FabiaschiPresident and Chief Executive OfficerLPA Software, Inc.Sven WehrweinFinancial Consultant54
I, Michael H. Carrel, certify that:
1. I have reviewed this Annual Report on Form 10-K of Zamba Corporation;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date:
Corporate OfficersPaul D. EdelhertzPresident and Chief Executive OfficerMarch 31, 2003
/s/ Michael H. Carrel
Vice President andChief Financial Officer
Peter MartonExecutive Vice PresidentChief Operating OfficerTodd X. FitzwaterSenior Vice PresidentCommittees of the BoardAudit CommitteeJoseph B. CostelloSven WehrweinCompensation CommitteeJoseph B. CostelloDixon R. Doll
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