UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, 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 .
Commission File Number 0-22718
ZAMBA CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Delaware | 41-1636021 | |
(State or Other Jurisdiction of | ||
Incorporation or Organization) | (I.R.S. Employer |
3033 Excelsior Blvd, Suite 200, Minneapolis, Minnesota 55416
(Address of Principal Executive Offices, including Zip Code)
Registrant'sRegistrant’s Telephone Number, Including Area Code: (952) 832-9800
Securities registered pursuant to Section 12(b) of the Act: None
Securities 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 of registrant'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 ý
The aggregate market value of votingthe registrant’s common stock held by non-affiliates of the registrant was approximately $45,149,258$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 the Registrant's Common Stock as reported onoutstanding shares of the Nasdaq National Market on March 9, 2001.registrant’s common stock are assumed to be affiliates.
The number of shares outstanding of the registrant'sregistrant’s common stock, as of March 9, 2001,21, 2003, was 32,175,21338,822,679 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the registrant’s Annual Meeting of Stockholders to be held on May 17, 2001,June 5, 2003, are incorporated by reference into Part III of this report .report.
PART I
DisclaimerCautionary Statement Regarding Forward-Looking Information
Certain statements in this Annual Report on Form 10-K are "forward-looking statements"“forward-looking statements” within the meaning of Section 27A of the Private Securities Litigation Reform Act of 1995. When used in this Report on Form 10-K,1933 and Section 21E of the Securities Exchange Act of 1934. You can identify these forward-looking statements by our use of the words “may,“believes,” “should,“anticipates,” “plans,” “expects,” “plans,“may,” “anticipates,“will,” “believes,” “estimates,” “predicts,“would,” “intends,” “potential” or “continue”“estimates” and similar expressions, are generally intended to identify forward-looking statements. Becausewhether in the negative or affirmative. We cannot guarantee that we actually will achieve these forward-looking statements involve risks and uncertainties, actualplans, intentions or expectations. Actual results or events could differ materially from those expressed or implied by thesethe plans, intentions and expectations disclosed in the forward-looking statements.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 impact forward-looking statements include, among others, the growth rate of the marketplace for customer-centric solutions, our ability to develop skills in implementing customer-centric solutions, the ability of our partners to maintain competitive products, the impact of competition and pricing pressures from actual and potential competitors 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 in our filings with the Securities and Exchange Commission, including the factors set forth on Exhibit 9999.01 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 leading customer relationship management ("CRM")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 provide strategy and business process consulting, as well as customization and systems integration company for Global 2000 organizations. We were incorporated in Delaware in 1990. One of the largest companies focused exclusively on CRM services,software applications, which we helpcall “packages,” that our clients better anticipate, understand and respond to the needs of their current and potential customers through integrated, multi-channel solutions.purchase from third parties. Based on our CRM expertise and experience, we have created an end-to-end blueprinta framework of industry-leading solutions addressing each aspect of CRM,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 analytics, commerceservice channels, such as the Internet, telephone, fax, email, wireless, and content, contact center, mobiledirect.
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 wireless, sales,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 support. Our intent isbusiness 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 becomegenerate tangible business benefits for their investments.
•Analytics & Marketing – This helps organizations build a leading CRM services companycomprehensive 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 bringing togetherenabling enterprises to market and sell directly to customers online through the brightest peopleefficient 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 CRM industryprobability 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 offerlink 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 comprehensive setsubstantial amount of innovative solutions based on best-in-class productsour revenue from the sales of proprietary hardware and processes.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 capabilities and geographic presence.
In 1998, less than 4% of our revenue was derived from the sale of proprietary hardware and software. Since 1999, less than 1% of our revenue was derived from the sale of proprietary hardware and software. We now exclusively provide customer care services as described above.
We currently derive a portion of our revenue from sales outside the United States. Approximately 11% of our 2002 revenues and 10% of our 2001 revenues were derived from customers located in Canada, including Enbridge Services, which is one of our larger accounts. In 2000, less than 1% of our revenues were derived from Enbridge, and we received no other revenue from customers outside the United States. Any long-lived assets located in foreign countries were immaterial for the past three fiscal years.
Industry Background
CRM is an integral function
Customer-centric business strategies are used by businesses and governmental organizations to enhance their customers’ access to and experience with their enterprise through multiple channels of communication, including the Internet, telephone, and direct sales. In addition, organizations implement Customer-centric business because it addresses onestrategies to increase their knowledge of the most fundamental business needs – howtheir customers’ preferences and needs.
The ability to profitably attract, retain, service and support customers. At the same time, with the segmentation of various markets and industries, companies are demanding solutions that suit their differentexpand customer demographics and psychographics. These two factors have contributed to growth in the CRM market.
The size, growth and direction of the CRM services market, while being influenced by global economic trends, also moves in accordance with growth and developments in other markets and technologies, as well as other factors, including the following:
In addition, the fast speed of technology improvement, which shortens solution lifecycles, directly impacts the market for CRM services.
The rapid shift to customization and one-to-one relationships with customers has required a new approach to developing and deploying CRM solutions. Understanding industry and market segmentation, as well as differences between companies in similar industries and markets, is critical to our success as the needs and objectives of companies vary widely. As the market continues to become increasingly segmented, the ability to provide solutions that meet those varying needs is a prerequisite for long-term success.
In a segmented business market with high competition, potential success factors include:
in today’s highly competitive market. As companies continueimplement tools and best practices to emphasize the need to optimizeenhance their customer relationshipsmanagement 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 increasingly competitive new economy, the enterprise modelpast twelve to
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eighteen months, there has been a pronounced decline in customer spending for information technology consulting services. There is shifting away from the old, company-centric modelno assurance that expenditures for information technology consulting services will return to a new, customer-centric model.their former levels.
In particular, 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. Our CRM solutions are intended to assist our clients with their relationships with their customers.
Our Solutions
Clients are demanding completely integrated multi-channel solutions that help them bring the various points of customer interactions together. By organizing and aligning resources (best of breed/best practices) within the CRM universe (including vendors, technologies, industry/media analysts, professionals, academia and alternate solution providers), we will offer “packaged” solutions to address a host of customer issues, driven by a comprehensive CRM blueprint. Our CRM blueprint guides companies to the realization of completely integrated, strategic CRM solutions. Our specific solution offerings include:
We primarily target Global 2000 companies facing the critical requirement to satisfy their customers’ needs profitably. We help companies achieve their objectives by implementing technology-based solutions that unify all facets of their CRM strategy to ensure consistent, industry- leading customer-centric behaviorslarge and processes across multiple interaction channels.mid-size corporations. We have proven our CRM expertise by implementing solutions for nearlyover 300 clients including: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 the only customer who accounted for more than 10% of our revenues in 2000.
In order to deliver best-in-class solutions, we have established alliances with severalsome of the world’s leading software companies and technology providers, including:providers. Some of the companies that we have worked with in the past year include Amdocs, Art Technology Group, Aspect Communications, Genesys, Informatica, Interwoven, Microsoft, PeopleSoft, and Siebel 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 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 also own approximately one-thirda material share of the equity in NextNet Wireless, Inc. (“NextNet”), a private corporation engaged 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 the development“last mile” of wireless data products targeted at wireless DSL. The vice-chairman of ZAMBA,the communications network. Our chairman, Joseph B. Costello, is also the chairman and CEOa shareholder of NextNet Wireless.NextNet. Another one of our directors, Dixon Doll, is also a director and a shareholder of NextNet. SeveralAdditionally, another director of NextNet’s employees are former employeesZamba, 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 ours, butour 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 no involvementplaced 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 NextNet’s operations other than througha prior purchaser of NextNet shares from us, to purchase 125,000 additional shares of our role as a shareholder and our common directors, Mr. Costello and Dr. Doll. Our involvement withSeries A Preferred Stock in NextNet is thatfrom us at $6.00 per share, any time prior to the close of a passive investor.business on May 17, 2004.
Competition
The CRM consulting and 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, including consulting and systems integration firms, contract programming companies, application software firms and their professional services groups, and e-business solution providers.teleservice and contact center outsourcers.
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We believe that our primary competitors can be classified into three groups:include:
• Large systems integrators or management consulting firms (e.g., Accenture, IBM, BearingPoint, EDS)
• CRM consulting companies (e.g., Akibia, Braun, E-Loyalty, Inforte)
In addition to these external competitors, we also face competition from the professional service organizations of customer care product vendors and the information technology 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’ responsiveness to customer needs.
Many of our direct, indirect We believe that technological changes, the decreased spending on information technology consulting services by many current and potential future competitors have financial, technical, marketing, sales, distributionclients, and other 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 a niche expertiserapid evolution in specific application technologies. Thisthe 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 of operations, and financial condition.operations.
People are the most important ingredient in our success, and we attempt to foster programs to make ZAMBA a 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, 2000,2002, we had 29163 employees, mainly throughout North America, including 5 full-time contractors.America. Of that total, 21444 individuals were in theour professional staff, 57and 19 were in administrative roles and 20business 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 in business development.2002 and 2001 is contained in Item 7 of this report.
Our employees are not parties to any collective bargaining agreements, and we believe that relations with our employees are good.
Proprietary Rights
Our 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. We generally enter into confidentiality agreements with employees, consultants, clients and potential clients and limit access to, and distribution of, our propriety information. There can be no assurance that our actions will be adequate to deter misappropriation of our propriety information or that we will be able to detect unauthorized use and take appropriate steps to enforce our intellectual property rights.
Our business includes the development
One component of our services is to develop custom software applications in connection with specific client engagements. Ownership of such software is generally assigned to our clients. In addition, we also develop 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 remain our property.
Although we believe that our 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 against us in the future.
Web Site Access to SEC Filings
Our Web site address is www.zambasolutions.com. We make our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K and all amendments to those reports available free of charge on our Web site as soon as reasonably practicable after such material is electronically filed with the SEC.
Item 2. PropertiesProperties.
Our headquarters facility consists of approximately 26,77010,000 square feet located in a multi-story building in Minneapolis, Minnesota. The facility is leased pursuant to an agreement that expires in December 2005. We also maintain leased officesapproximately 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 for operations and sales functionsapproximately 75,000 square feet in Campbell and Pleasanton, California,California; Colorado Springs and Parker, Colorado; Boston, Massachusetts; St. Paul, Minnesota, and 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, and Boston, Massachusetts. We believe thatfacility, which terminated at the end of September 2002, we negotiated buyouts of all of the leases for these facilities are adequateduring 2002.
We accrued various charges related to meet our present needs. However, we may need to expand our current facilities and to move into new facilities to meet anticipated growthlease terminations, including the following amounts in the future. Additionalquarter 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 $1.19 million in the second quarter of 2002. As a result, future obligations for our office leases have decreased to approximately $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 aboutregarding our lease obligations are set forthtermination agreements for facilities is contained in Note 37 to the consolidated 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.
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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 currently believe that resolvingwe 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.
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 Key Equipment Finance, to terminate our lease for office furniture and settle related litigation. Under the agreement, we will notpay 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 material adverse effect on our business, financial conditionfacility in Campbell, California, and resultssettle related litigation. Under the termination and release for this facility, we will pay a total of operations.$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.
No matters were submitted to a vote of our stockholders during the fourth quarter of 2000.2002.
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PART II
Item 5. Market For Registrant'sRegistrant’s Common Equity and Related Stockholder Matters.
We were incorporated in Delaware in 1990 under the name Racotek, Inc..Inc. Our common stock began trading on December 10, 1993, on the Nasdaq National Market under the symbol “RACO,” in connection with our initial public offering. We changed our corporate name to Zamba Corporation on October 5, 1998, and, in conjunction with this name change, our common stock began trading on the Nasdaq National Market under the symbol “ZMBA.” As of July 1, 2002, our stock began trading on the Over-The-Counter Bulletin Board (“OTC BB”).
A summary of the range of high and low closing prices for our common stock for each quarterly period in the two most recent fiscal years, is presented below. These prices reflect interdealerinter-dealer prices and do not include retail markups, markdowns or commissions.
High | Low | |
1999 | ||
FirstQuarter | $3.75 | $2.00 |
Second Quarter | 2.97 | 1.56 |
Third Quarter | 2.56 | 1.50 |
Fourth Quarter | 18.94 | 1.88 |
2000 | ||
First Quarter | $0.13 | $8.00 |
Second Quarter | 9.13 | 4.81 |
Third Quarter | 7.00 | 4.25 |
Fourth Quarter | 4.81 | 1.63 |
|
| 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 our common stock and do not anticipate declaring or paying any cash dividends in the foreseeable future. We intend to retain future earnings, if any, for the development of our business.
On March 21, 2003, the last reported sale price of our common stock on the OTC BB was $0.20. As of March 9, 2001,21, 2003, we had approximately 7,4005,600 stockholders of record.
Item 6. Selected Financial Data.
CONSOLIDATED STATEMENTS OF OPERATIONS DATA (for the years ended December 31)
(In thousands, except per share data)
2000 | 1999 | 1998 | 1997 | 1996 | |
Revenues | $41,740 | $29,030 | $9,373 | $5,097 | $5,172 |
Costs and expenses: | |||||
Project and personnel costs | 20,364 | 15,083 | 4,463 | 4,546 | 3,695 |
Sales and marketing | 5,747 | 2,695 | 2,187 | 4,237 | 6,258 |
General and administrative | 14,605 | 9,252 | 3,628 | 2,721 | 2,091 |
Non-recurring items | 753 | - | - | - | - |
Research and development | - | - | 1,069 | 3,286 | 4,215 |
Amortization of intangibles and non-cash compensation | 3,129 | 4,096 | 996 | - | - |
Loss from operations | (2,858) | (2,096) | (2,970) | (9,693) | (11,087) |
Other income (expense), net | 182 | (10) | 188 | 422 | 855 |
Net loss | ($2,676) | ($2,106) | ($2,782) | ($9,271) | ($10,232) |
Net loss per share - basic and diluted | ($0.08) | ($0.07) | ($0.10) | ($0.36) | ($0.40) |
Weighted average common shares outstanding – basic and diluted | 31,572 | 30,628 | 26,792 | 25,932 | 25,372 |
|
| 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
CONSOLIDATED BALANCE SHEET DATA (as of December 31)
(In thousands)
2000 | 1999 | 1998 | 1997 | 1996 | |
Cash, cash equivalents and short-term investments | $4,843 | $7,973 | $3,054 | $5,414 | $11,972 |
Working capital | 7,643 | 6,707 | 4,173 | 5,182 | 12,727 |
Total assets | 17,013 | 16,511 | 14,383 | 7,533 | 16,995 |
Current and long-term debt | 1,076 | 1,389 | 1,683 | - | - |
Total stockholders' equity | 9,562 | 10,251 | 11,196 | 6,323 | 15,383 |
Quarterly Financial Information (unaudited) | ||||
March 31, 1999 | June 30, 1999 | September 30, 1999 | December 31, 1999 | |
(In thousands, except per share data) | ||||
Revenue | 5,351 | 7,007 | 8,578 | 8,095 |
Operating income (loss) | (1,050) | (722) | 408 | (732) |
Net income (loss) | (1,055) | (727) | 400 | (724) |
Earnings per share: | ||||
Basic | (0.04) | (0.02) | 0.01 | (0.02) |
Diluted | (0.04) | (0.02) | 0.01 | (0.02) |
|
| 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 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
March 31, 2000 | June 30, 2000 | September 30, 2000 | December 31, 2000 | |
(In thousands, except per share data) | ||||
Revenue | 8,217 | 9,715 | 11,310 | 12,498 |
Operating income (loss) | (937) | (564) | (832) | (525) |
Net income (loss) | (886) | (524) | (802) | (465) |
Earnings per share: | ||||
Basic | (0.03) | (0.02) | (0.03) | (0.01) |
Diluted | (0.03) | (0.02) | (0.03) | (0.01) |
Quarterly Financial Information (Unaudited)
(In thousands, except per share data)
|
| March 31, |
| June 30, |
| September 30, |
| December 31, |
| ||||
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, |
| June 30, |
| September 30, |
| December 31, |
| ||||
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
Item 7. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
ZAMBA SolutionsCorporation is a leadingpremier customer relationship management (CRM) consulting and systems integration company for Global 2000 organizations.care services company. We help our clients better anticipate, understandbe more successful in: acquiring, servicing, and respondretaining their customers. We work with our clients to help them to increase their customers’ access to the enterprise through the use of multiple channels of communication, including the internet, call-based routing, and sales force automation, and to increase the enterprise’s knowledge of the preferences and needs of their current and potential customers through integrated, multi-channel solutions.its customers. Based on our CRM expertise and experience, we have created an end-to-end blueprint of industry-leading solutions addressingthat we believe address each aspect of CRM,a customer-centric, including strategy, marketing and analytics, commercecontent and content,commerce, contact center, mobilefield sales, field service and enterprise integration. We also own approximately 12% of the equity in NextNet Wireless, Inc., a private corporation that develops non-line-of-sight broadband wireless sales, customer experienceaccess platforms that provide telecommunications carriers with solutions for rapid deployment of high-speed, two-way voice and support.data services over the “last mile” of the communications network. Our chairman, 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 from quarter-to-quarter based on the number, size and scope of projects in which we are engaged, the contractual terms and degree of completion of such projects, any delays incurred in connection with a project, the adequacy of provisions for losses, the accuracy of estimates of resources required to complete ongoing projects, and general economic conditions and other factors. RevenuesConsequently, 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.
We incurred significant losses and negative cash flows from operations during the year ended December 31, 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 the first quarter of 2003. This is discussed in more detail in the Liquidity and Capital Resources section of this report.
Results of OperationsRestructuring Charges and Non-Recurring Items
Results
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 all periods includefacility and employment matters, and in the historical resultssecond quarter of Camworks, Inc., which2002, we acquired on December 29, 1999,incurred unusual charges of $1.64 million for facility and non-cash compensation matters. Included in the effectfirst 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 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 with buy-out offers made by our landlords. We subsequently reached termination agreements with our St. Paul and Campbell landlords. Upon completion of the issuancetermination 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 exercise
10
by Paul Edelhertz of his right to assign to us an aggregate of 250,000 shares of our common stock in this transaction. Resultsexchange for all periods also includeour cancellation of a promissory note issued to us by Mr. Edelhertz bearing a principal balance of $500,000 and accrued interest through the historical resultsdate of Fusion Consulting, Inc., which we acquiredcancellation of $43,250. This transaction relates to an agreement dated December 26, 2000, as amended on January 7,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 effectsecond 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 issuance of shares of our common stock in this transaction. The acquisitions of Camworks and Fusion were both accounted for by the pooling-of-interests method.
Year Ended December 31, 2000, Compared to Year Ended December 31, 1999
Net Revenues
Net revenues increased 44% to $41.7 million in 2000 compared to $29.0 million in 1999. The increase was due principally to increasesrestructuring charge in the numbersecond quarter of billable personnel, average size2001 includes new and number of client projects as well as the average billing rate on the projects.
Projectadditional lease termination costs and Personnel Costs
Project costs consist 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 expense we incur in providing service. Project costs were $20.4 million, or 49% of net revenues, in 2000, compared to $15.1 million, or 52% of net revenues, in 1999. The increase in project costs was primarily due to an increase in project personnel from 153 at December 31, 1999, to 214 at December 31, 2000. While we expect to meet our hiring goals in 2001, competition for personnel with information technology skills is intense, and we therefore expect salaries and wages to continue to increase. We periodically review and update our billing rates to cover expected increases in costs.
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 $5.7 million, or 14% of net revenues, in 2000 compared to $2.7 million, or 9% of net revenues, in 1999. The dollar and percentage increases were primarily due to investments we made in a new brand identity and to higher paid sales personnel. We anticipate the dollar amount and percentage of sales and marketing expenses to increase in 2001.
General and Administrative
General and administrative costs consist primarily ofother expenses associated with our management, information technology, trainingdecisions to consolidate our operations and recruiting, occupancy costs,close unproductive or duplicative office locations in St. Paul, Minnesota and financePleasanton and administrative groups. General and administrative expenses were $14.6 million, or 35% of net revenues, in 2000, compared to $9.3 million, or 32% of net revenues, in 1999. The dollar and percentage increases were primarily due to investments we made in growing the business, which resulted in an increase in the number of employees hired during 2000, an increase in occupancy costs related to significant expansion of our office space, an increase in information technology infrastructure spending, and an increase in write-offs of uncollectible accounts receivable. As we grow and expand geographically in 2001, we expect general and administrative expenses to increase.
Non-recurring itemsCarlsbad, California.
Non-recurring charges of $753,000 were $753,000recorded in 2000. TheseThis represents approximately 2% of the revenue for 2000. The items consist of severance expenses for recently departed 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 |
| Severance and |
| 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
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 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 decrease in project costs between these periods was due 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 74% 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 and Non-Cash Compensation
Amortization of intangibles and non-cash compensation was $3.1 million$0 in 20002002 compared to $4.1 million$231,000 in 1999.2001. The amortization is mainly 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 allocated to the following categories: people and experiences, client references, client lists, and intellectual property and delivery methodology. These amounts are beingwere amortized over economic useful lives of between two and four years. Approximately 97%All of the costs related to the QuickSilver acquisition have beenwere fully amortized as of December 31, 2000.2001.
Non-cash compensation
Gain on Sale of NextNet Shares
We realized a gain on the sale of a portion of our investment in 2000 isNextNet of $5.22 million in 2002. We did not sell any of our NextNet shares in 2001. Our 2002 gain represents the proceeds from stock options grantedsales of approximately 1.1 million shares of our Series A Preferred Stock in NextNet to non-shareholder employees of Camworks and Fusion subsequent to our acquisitions of each company. The options were granted with an exercise price less than fair market value as an incentivevarious parties, which are more fully described in Note 11 to the employees to continue employment with ZAMBA. The remaining deferred compensation balance related to these options is $683,000 as of December 31, 2000. The amount ofconsolidated financial statements included in this charge will be approximately $57,000 per quarter for each quarter through 2003. 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.Annual Report on Form 10-K.
Interest Income
Interest income was $251,000$12,000 in 20002002 compared to $97,000$139,000 in 1999. This increase2001. The decrease is interest income is primarily due to increasedour having significantly smaller balances of cash and investment balances throughout 2000 comparedinvestments during 2002 in comparison to 1999. Because our cash balance decreased throughout the year 2000, we expect interest income to decrease in 2001.
Interest Expense
Interest expense in 20002002 was $69,000$280,000 compared to $107,000$188,000 in 1999. This decrease2001. The increase in interest expense is due to paying down notes payable, primarily thoseour increased borrowing needs in 2002, increased interest rates under our accounts receivable funding agreement, which was signed in July 2002, and the predecessor line of credit facility, and higher amortization of issuance costs related to the notes payable issued in September 1998 in connection withaccounts receivable funding agreement and the acquisition of QuickSilver.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 such net operating loss carryforwards in the accompanying consolidated financial statements.
As of December 31, 2000,2002, we had approximately $72.4$87 million of net operating loss carryforwards for both financial statement and for federal income tax purposes that will begin to expire in 2005. The use of these carryforwards in any one year is limited under Internal Revenue Code Section 382 because of significant ownership changes. In addition, the net operating loss carryforward of QuickSilver is limited under the federal consolidated tax return rules.
13
Net Revenues
Net revenues increased 209%
Revenues decreased approximately 20% to $29.0$36.8 million in 1999,2001 compared to $9.4$46.2 million in 1998,2000. 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 to the continued significant reduction in the demand for information technology consulting services, which is the result of the 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 experienced strong downward pricing pressures, which adversely impacted our transition to the sale of services instead of selling stand-alone software products and the fact that we had a full year of joint operations following our acquisition of QuickSilver on September 22, 1998.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 with, and varies with, the level of client services being delivered. These costs represent the most significant expense we incur in providing service. Project costs were $15.1$20.0 million, or 52%approximately 54% of net revenues, in 1999,2001, compared to $4.5$20.5 million, or 48%approximately 45% of net revenues, in 1998.2000. 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 was primarilybeing 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 in 2000. The decrease is due to an increasethe overall decline in project personnel from 80 at December 31, 1998 to 153 at December 31, 1999.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 $2.7$5.8 million, or 9%approximately 16% of net revenues in 1999,2001, compared to $2.2$5.8 million, or 23%approximately 13% of net revenues, in 1998.2000. 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. The dollar increase as a percentage of revenue was primarily due to an increase in the number of sales personnel. The percentage decrease was primarily due to our increased net revenues.lower revenue than anticipated.
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 $9.3$14.5 million, or approximately 39% of revenues, in 2001, compared to $14.6 million, or 32% of net revenues, in 1999, compared to $3.6 million, or 39%2000. The increase as a percentage of net revenues, in 1998. The dollar increaserevenue was primarily due to an increaserevenue 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 numbersecond half of employees hired during 1999, an increase2000, primarily in occupancy costs related to significant expansion of our office space,Campbell, California and an increaseMinneapolis, Minnesota. Equipment rent increased by $800,000 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.
Research and Development
Research and development expenses were $0, or 0% of net revenues, in 1999,2001 as compared to $1.1 million, or 11%2000 due to leasing of net revenues,furniture, computers and computer equipment, and upgraded phone systems. Much of this equipment was leased in 1998. The dollarthe third and percentage decrease is due primarily to thefourth 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 researchdepreciation 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 to
14
recruiting fees paid for new hires. Travel and development personnel which occurredentertainment costs decreased by $700,000 in 2001 as a result of discontinuing any product development or enhancements of the KeyWare product linecompared to 2000, mainly due to cost-savings initiatives. Bad-debt expense decreased by $540,000 in 1998, and the transfer of the NextNet technology2001, as compared to 2000, mainly due to three dot-com customer write-offs in September 1998 to NextNet Wireless.2000.
Amortization of Intangibles and Non-Cash Compensation
Amortization of intangibles and non-cash compensation was $4.1$231,000 in 2001 compared to $2.9 million in 1999, compared to $1.0 million in 1998.2000. The amortization is mainly 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 allocated to the following categories: people and experiences, client references, client lists, and intellectual property and delivery methodology. These amounts are beingwere amortized over economic useful lives of between two and four years.
Non-cash compensation charges in 1999 and 1998 consist mainly All of expenses associated with Camworks stock granted to Camworks employees priorthe costs related to the merger under pre-existing changeQuickSilver acquisition were fully amortized as of control provisions within these employment agreements. These stock grants represented a one-time charge to earnings of $325,000 in 1999 and $60,000 in 1998.December 31, 2001.
Interest Income
Interest income was $97,000$139,000 in 19992001 compared to $247,000$251,000 in 1998.2000. The decrease in interest income is principallyprimarily due to decreasedour having significantly smaller balances of cash and investment balances at the beginning of 1999.investments during 2001 in comparison to 2000.
Interest Expense
Interest expense in 19992001 was $107,000$188,000 compared to $59,000$69,000 in 1998.2000. The increase in interest expense is due to interest expense relatedestablishing, and using a line of credit with Silicon Valley Bank in 2001.
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 such net operating loss carryforwards in the accompanying consolidated financial statements.
Critical Accounting Policies
We have identified the policies below as critical to our business operations and the understanding of our results of operations. The impact and any associated risks to these policies on our business, financial conditions and results 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 these and other accounting policies, see Note 1 of our notes to the notes payable issuedconsolidated financial statements. Our preparation of this Annual Report on Form 10-K requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities as of the date of our financial statements, and the reported amounts of revenue 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 September 1998NextNet 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 the 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 a loss becomes apparent. Revenue
15
pursuant to time and material contracts are recognized as the services are performed. Customer support revenues are recognized ratably over the term of the underlying support agreements. We have binding contractual agreements with our customers to support our revenue.
Significant management judgments and estimates must be made and used in connection with the acquisitionrevenue recognized on fixed bid contracts in any accounting period. Material differences may result in the amount and timing of QuickSilver.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
We invest predominantly in instruments that are highly liquid, investment grade and have maturities of less than one year. At December 31, 2000,2002, we had approximately $4.8 million$549,000 in cash and cash equivalents compared to $8.0$1.33 million at December 31, 1999.2001. As of December 31, 2002, we had a negative working capital of $2.64 million, and a stockholder’s deficit of $2.33 million.
Cash used in operating activities was $2.1$8.4 million for the year ended December 31, 20002002, and resulted primarily from income before amortization, depreciation and other non-cash stock compensation chargesan overall net loss, not including our gains on sales of $1.2NextNet shares, of approximately $11.8 million, increases in accounts payable of $510,000, provision for bad debts of $965,000 and deferred revenue of $717,000, but were offset by an increase in accrued expenses of $925,000, a decrease in accounts receivable of $3.2 million,$900,000, and a decrease in notes receivable of $2.0 million, and prepaid expenses and other assets of $590,000.$535,000. Cash provided byused in operating activities was $5.0$5.5 million for the year ended December 31, 1999, due2001, and resulted primarily from income before amortization, depreciation and other non-cash stock compensation chargesa net loss of $2.8$9.5 million and increasesa decrease in accrued expensesdeferred revenue of $2.2$1.4 million, and accounts payable of $821,000. These amounts were offset by an increasea decrease in accounts receivable of $1.4$4.0 million, and a decrease in notes receivable of $1.3 million.
Cash used inprovided by investing activities was $2.3$5.4 million for the year ended December 31, 2000,2002, and resulted primarily from the purchaseproceeds from sales of property and equipmenta portion of $1.4 million and the increase in notes receivable of $900,000.our NextNet shares. Cash used in investing activities was $704,000$703,000 for the year ended December 31, 19992001, and resulted primarily from the purchase of property and equipment.
Cash provided by financing activities was $1.3$2.2 million for the year ended December 31, 20002002, and consisted primarily of cash receivedproceeds from the sale of common stock upon the exercise of stock options,$1.7 million and proceeds from a short-term loan of $1.0 million, but was partially offset partially by paymentsa decrease in the line of outstanding debt.credit balance of $802,000. Cash provided by financing activities was $670,000$2.7 million for the year ended December 31, 19992001, and consisted primarily of cash receivedproceeds from the sale of common stock uponof $2.3 million and proceeds from the exerciseline of stock options,credit of $1.1 million, but was partially offset partially by $490,000 of payments of outstanding debt.
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Future payments due under debt and lease obligations, as of December 31, 2002, are as follows (in thousands):
Year Ending |
| Bank Line |
| Short - |
| Notes |
| Non |
| Accrued |
| 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 2001, 17, 2003, we establishedentered 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 secured revolving credit facilitytotal 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 shares 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 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 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 $5.0$2.0 million based on eligible collateral. Borrowingsreceivables, and is secured by virtually all of our assets. The balance outstanding under this line of credit bear interestwas $298,000 at the bank’s prime rate plus 2.0%. This agreement requires thatDecember 31, 2002. Based on eligible receivables, an additional $325,000 was available for borrowing at December 31, 2002. Prior to July 29, 2002, we maintain certainmaintained a line of credit with Silicon Valley Bank. Although there are no financial covenants and levels of tangible net worth. This facility is renewable annually.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 our existing cash and cash equivalents at December 31, 2000, 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 cash provided from operations andwe obtain on a regular basis under our secured revolving credit facility,Accounts Receivable Purchase Agreement with Silicon Valley Bank, will be sufficient to meet our working capital and capital expenditure requirements through at least 2001.December 31, 2003. We will continue to explore possibilities for additional financing, which may include debt, equity, or other forms of financing transactions.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.
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New Accounting Standards
The
In November 2001, the Financial Accounting Standards Board (FASB) issued StatementStaff Announcement, Topic No. D-103, regarding the income statement classification of reimbursements received for “out-of-pocket” expenses incurred. This 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 it 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 income (loss) or earnings (loss) per share.
In June 2002, the Financial Accounting StandardStandards Board (FASB) issued SFAS No. 133146 “Accounting for Derivative Instruments and Hedging Activities” (SFAS No. 133), as amended byCosts Associated with Exit or Disposal Activities.” SFAS No. 138.146 supersedes EITF No. 94-3. The principal difference between SFAS No. 133 establishes accounting146 and reporting standards for derivative instruments and for hedgingEITF No. 94-3 relates to when an entity can recognize a liability related to exit or disposal activities. SFAS No. 133146 requires companiesa 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 recognizean 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 all derivatives as either assetsexit or liabilities, and measuring those instruments at fair value. The statement is effective beginningdisposal activities initiated after January 1, 2001. We plan2003.
Controls and Procedures
In order to implement SFAS No. 133, as amended,ensure that the information we must disclose in fiscal year 2001. The adoption of this statement would not have had an adverse impact on our financial position, results of operations or cash flows in fiscal year 2000.
In December 1999,filings with the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin ("SAB"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”) 101, “Revenue Recognition in Financial Statements,” which provides guidance relatedas of a date within 90 days prior to revenue recognition. The implementationthe filing date of this statement wasreport (the “Evaluation Date”). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective beginning in bringing to their attention on a timely basis material information relating to Zamba required to be included in our periodic filings under the fourth quarter of 2000 and didExchange Act.
Since the Evaluation Date, there have not have an impact onbeen any significant changes in our business, financial position, results of operationsinternal controls, or cash flows.in other factors that could significantly affect these controls subsequent to the Evaluation Date.
Item 7A. Quantitative and Qualitative Disclosures About Market RiskRisk.
We 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 on our outstanding debt obligations of $1.1$430,000, our accounts receivable purchase agreement of $298,000, and our note payable to Entrx of $1.0 million at December 31, 2000.2002. As discussed in Note 10 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 our long-term debt obligations range from 6.0%the note payable to 10.5%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 obligations mature monthlyfirst quarter of 2003 and quarterly throughthe obligation of Entrx to pay a third installment was 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 December 2003. We 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 areshould not expected to have a material effect on our financial condition or results of operations.
On February 27, 2001, we established a secured revolving credit facility with Silicon Valley Bank. Borrowings under this line of credit bear interest at the bank’s prime rate plus 2%, and is payable monthly.
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Item 8. Financial Statements and Supplemental Schedule.
The Financial Statements, Supplemental Schedule and Independent Auditors’ Report thereon that follow this Annual Report on Form 10-K are incorporated herein by reference (page numbers refer to pages in the Annual Report):
Reports of Independent Auditors
Consolidated Balance Sheets as of December 31, 2000 and 1999
Consolidated Statements of Operations for the years ended December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998
Notes to Consolidated Financial Statements
Supplemental Schedule – Schedule II Valuation and Qualifying Accountsreference:
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PART III
Item 10. Directors and Executive Officers of the Registrant.
The information concerning our directors and executive officers and compliance with Section 16(a) required by this item is contained in the sections entitled "Nominees"“Election of Directors” in ProposalItem No. 1, "Executive Officers"“Executive Officers” and "Section“Section 16(a) Beneficial Ownership Reporting Compliance,"” appearing in our definitive Proxy Statement (the “Proxy Statement”) to be delivered to stockholders in connection with the Annual Meeting of Stockholders to be held on May 17, 2001,June 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?” in ProposalItem No. 1, "Executive Compensation"“Executive Compensation” (except for the information set forth under the sub-caption “Compensation Committee Report on Executive Compensation”“Report of the Compensation Committee”) and "Compensation“Compensation Committee Interlocks and Insider Participation,"” appearing in our Proxy Statement 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 in our Proxy Statement 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 in our Proxy Statement and is incorporated herein by reference.
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Item 14. Exhibits, Financial Statement Schedules 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, 20002002 and 19992001
-• Consolidated Statements of Operations for the years ended December 31, 2000, 19992002, 2001 and 19982000
-• Consolidated Statements of Cash Flows for the years ended December 31, 2000, 19992002, 2001 and 19982000
-• Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended December 31, 2000, 19992002, 2001 and 19982000
-• Notes to Consolidated Financial Statements
-• Supplemental Schedule – Schedule II Valuation and Qualifying Accounts
• Independent Auditors’ Report
- Report of Independent Auditors
(2) Financial Statement Schedules
- 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) Exhibits
3.01 | Registrant’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). | |
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). | |
3.03 | Registrant’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). | |
4.01 | Form of specimen certificate for Registrant’s Common 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). | |
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). | |
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’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). | |
10.02* | Registrant’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).** | |
10.03 | Registrant’s 1993 Directors Stock Plan, as amended, and related documents, as amended through November 14, 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’s 1994 Officer’s Option 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). | |
10.05* | 1997 Stock Option Plan for Key Employees, Consultants and Directors of QuickSilver Group, Inc. (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’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). | |
10.07* | Form of Indemnification Agreement entered into by the Registrant and each of its directors and executive officers (Incorporated by reference to Exhibit 10.12 to the Registrant’s Registration Statement on Form S-1 (No. 33-70728), that was declared effective December 9, 1993). | |
10.08 | Lease 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). | |
10.09 | Lease 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 (Incorporated by reference to Exhibit 10.23 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1998). | |
10.10* | Change of Control Agreement between the Registrant and Michael Carrel dated July 8, 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). | |
10.11* | Change of Control Agreement between the Registrant and Ian Nemerov dated July 8, 1999 (Incorporated by reference to Exhibit 10.03 to the Registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 1999). |
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10.12 | 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). | |
10.13 | Work Letter Agreement dated January 4, 2000, between the Registrant and WTA Campbell Technology Park 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. | |
24.01 | Power of Attorney (included on signature page to this report). | |
99.01 | Cautionary Statement Regarding Forward-Looking Statements. |
28
99.02 | Certification of Chief Executive Officer and Chief Financial Officer 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. |
(b) Reports on Form 8-K
None
(c) ExhibitsOn February 26, 2003, we filed a report on Form 8-K to report the following:
We hereby file
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 some of our shares of NextNet Wireless, Inc. Series A Preferred Stock.
(c)Exhibits as listed under- See Item 14 (a) (3).
(d) Financial Statement Schedules - See Item 14(a)(2).
None
Independent Auditors'Auditors’ Report
The Board of Directors and Stockholders of
ZAMBA Corporation:
We have audited the consolidated financial statements of ZAMBA Corporation and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the auditsaudit 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, 20002002 and 1999,2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000,2002, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
Minneapolis, MinnesotaJanuary 23, 2001, except as to note 15, which is as of February 27, 2001
ZAMBA CORPORATION | ||
CONSOLIDATED BALANCE SHEETS | ||
December 31, 2000 and 1999 | ||
(In thousands, except share and per share data) | ||
ASSETS | ||
2000 | 1999 | |
Current assets: | ||
Cash and cash equivalents | $4,843 | $7,973 |
Accounts receivable, net | 5,858 | 3,659 |
Unbilled receivables | 426 | 274 |
Notes receivable | 1,979 | - |
Notes receivable - related parties | 859 | 3 |
Prepaid expenses and other current assets | 660 | 242 |
Total current assets | 14,625 | 12,151 |
Property and equipment, net | 1,650 | 1,068 |
Restricted cash | 264 | 110 |
Intangible assets, net | 231 | 3,111 |
Other assets | 243 | 71 |
Total assets | $17,013 | $16,511 |
LIABILITIES AND STOCKHOLDERS' EQUITY | ||
Current liabilities: | ||
Current installments of long-term debt | $607 | $573 |
Accounts payable | 1,589 | 1,079 |
Accrued expenses | 3,306 | 3,029 |
Deferred revenue | 1,480 | 763 |
Total current liabilities | 6,982 | 5,444 |
Long-term debt, less current installments | 469 | 816 |
Commitments (Note 3) | ||
Total liabilities | 7,451 | 6,260 |
Stockholders' equity : | ||
Preferred stock, $0.01 par value, 5,000,000 shares authorized, none issued or outstanding | - | - |
Common stock, $0.01 par value, 55,000,000 shares authorized, 32,164,259 and 31,109,518 issued and outstanding at December 31, 2000 and 1999, respectively | 322 | 311 |
Additional paid-in capital | 81,876 | 79,900 |
Accumulated deficit | (72,636) | (69,960) |
Total stockholders' equity | 9,562 | 10,251 |
Total liabilities and stockholders' equity | $17,013 | $16,511 |
/s/ KPMG LLP | |
Minneapolis, 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
ZAMBA CORPORATION
December 31, 2002 and 2001
(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 |
|
The accompanying notes are an integral part of the consolidated financial statements.
31
ZAMBA CORPORATION | |||
CONSOLIDATED STATEMENTS OF OPERATIONS | |||
Years ended December 31, 2000, 1999 and 1998 | |||
(In thousands, except share and per share data) | |||
2000 | 1999 | 1998 | |
Net revenues | $41,740 | $29,030 | $9,373 |
Costs and expenses: | |||
Project and personnel costs | 20,364 | 15,083 | 4,463 |
Sales and marketing | 5,747 | 2,695 | 2,187 |
General and administrative | 14,605 | 9,252 | 3,628 |
Non-recurring items | 753 | - | - |
Research and development | - | - | 1,069 |
Amortization of intangibles and non-cash compensation | 3,129 | 4,096 | 996 |
Loss from operations | (2,858) | (2,096) | (2,970) |
Other income (expense): | |||
Interest income | 251 | 97 | 247 |
Interest expense | (69) | (107) | (59) |
182 | (10) | 188 | |
Net loss | ($2,676) | ($2,106) | ($2,782) |
Net loss per share - basic and diluted | ($0.08) | ($0.07) | ($0.10) |
Weighted average common shares outstanding | 31,571,549 | 30,627,756 | 26,792,001 |
ZAMBA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2002, 2001 and 2000
(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 |
| ||||||
The accompanying notes are an integral part of the consolidated financial statements.
ZAMBA CORPORATION | |||
CONSOLIDATED STATEMENTS OF CASH FLOWS | |||
Years ended December 31, 2000, 1999 and 1998 | |||
(In thousands) | |||
2000 | 1999 | 1998 | |
Cash flows from operating activities: | |||
Net loss | ($2,676) | ($2,106) | ($2,782) |
Adjustments to reconcile net loss to net cash | |||
provided by (used in) operating activities: | |||
Depreciation and amortization | 3,916 | 4,613 | 1,468 |
Loss on disposal of fixed assets | 63 | - | 8 |
Provision for bad debts | 965 | 83 | 13 |
Forgiveness of promissory note receivable | - | - | 150 |
Amortization of discounts on investments | - | - | (17) |
Non-cash stock compensation | - | 325 | 60 |
Changes in operating assets and liabilities: | |||
Accounts receivable | (3,164) | (1,377) | (16) |
Unbilled receivables | (152) | 35 | (295) |
Notes Receivable | (1,979) | ||
Prepaid expenses and other assets | (590) | 54 | 55 |
Accounts payable | 510 | 821 | (284) |
Accrued expenses | 277 | 2,169 | (614) |
Deferred revenue | 717 | 336 | (38) |
Net cash provided by (used in) operating activities | (2,113) | 4,953 | (2,292) |
Cash flows from investing activities: | |||
Purchase of investments | - | - | (2,327) |
Proceeds from maturity of investments | - | - | 4,577 |
Purchase of property and equipment | (1,433) | (636) | (329) |
Notes receivable - related parties | (856) | - | - |
Proceeds from sale of fixed assets | - | - | 91 |
Acquisition, net of cash acquired | - | - | (2,128) |
Other | - | (68) | (42) |
Net cash used in investing activities | (2,289) | (704) | (158) |
Cash flows from financing activities: | |||
Proceeds from exercises of options and warrants | 1,739 | 729 | 178 |
Proceeds from sale of preferred stock | - | - | 2,000 |
Proceeds from debt | 113 | 240 | 96 |
Payments on debt | (426) | (382) | (70) |
Changes in restricted cash | (154) | 100 | 155 |
Dividends | - | (17) | (36) |
Net cash provided by financing activities | 1,272 | 670 | 2,323 |
Net increase (decrease) in cash and cash equivalents | (3,130) | 4,919 | (127) |
Cash and cash equivalents, beginning of period | 7,973 | 3,054 | 3,181 |
Cash and cash equivalents, end of period | $4,843 | $7,973 | $3,054 |
32
ZAMBA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2002, 2001 and 2000
(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 |
|
The accompanying notes are an integral part of the consolidated financial statements.
ZAMBA CORPORATION | |||||||
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY | |||||||
Years ended December 31, 2000, 1999 and 1998 | |||||||
(In thousands, except share data) | |||||||
Common Stock | |||||||
Shares | $0.01 Par Value | Additional Paid-In Capital | Accumulated Deficit | Promissory Note Receivable | Total Stockholders' Equity | ||
Balances at December 31, 1997 | 26,078,559 | $261 | $71,281 | ($65,072) | ($150) | $6,320 | |
Exercise of stock options | 143,330 | 2 | 176 | - | - | 178 | |
Shares issued in acquisition | 2,337,980 | 23 | 2,929 | - | - | 2,952 | |
Options and warrants issued in acquisition | - | - | 1,275 | - | - | 1,275 | |
Issuance and conversion of preferred to common | 1,000,000 | 10 | 1,990 | - | - | 2,000 | |
Conversion of note to common stock | 534,335 | 5 | 1,032 | - | - | 1,037 | |
Dividends declared | (10) | - | - | (10) | |||
Non-cash compensation | - | - | 60 | - | - | 60 | |
Other non-cash item | - | - | 15 | - | - | 15 | |
Forgiveness of promissory note receivable | - | - | - | - | 150 | 150 | |
Net loss | - | - | - | (2,782) | - | (2,782) | |
Balances at December 31, 1998 | 30,094,204 | 301 | 78,748 | (67,854) | - | 11,195 | |
Exercise of stock options | 497,520 | 4 | 725 | - | - | 729 | |
Exercise of warrants | 461,183 | 5 | (5) | - | - | - | |
Non-cash compensation | - | - | 325 | - | - | 325 | |
Conversion of note to common stock | 56,611 | 1 | 107 | - | - | 108 | |
Net loss | - | - | - | (2,106) | - | (2,106) | |
Balances at December 31, 1999 | 31,109,518 | $311 | $79,900 | ($69,960) | $- | $10,251 | |
Exercise of stock options | 1,054,741 | 11 | 1,728 | - | - | 1,739 | |
Amortization of non-cash compensation | - | - | 248 | - | - | 248 | |
Net loss | - | - | - | (2,676) | - | (2,676) | |
Balances at December 31, 2000 | 32,164,259 | $322 | $81,876 | ($72,636) | $- | $9,562 | |
The accompanying notes are an integral part of the consolidated financial statements. | |||||||
33
ZAMBA CORPORATION
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
Years ended December 31, 2002, 2001 and 2000
(In thousands, except share data)
|
| Common Stock |
| Additional |
| Note |
| Accumulated |
| Total |
| |||||||
Shares |
| Par | ||||||||||||||||
Balances 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 | ) |
The accompanying notes are an integral part of the consolidated financial statements.
34
ZAMBA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Business Description:
ZAMBA Corporation provides comprehensive Customer Relationship Management (CRM) solutions to Global 2000 companies.is a customer care services company. We help our clients increase customer loyaltybe more successful in acquiring, servicing, and sales by improving those areas withinretaining their customers. We provide strategy and business process consulting, as well as customization and systems integration for software applications, which we call “packages,” that impact their customers.our clients purchase from third parties. We derive substantially all of our revenues from professional services. Prior to October 1998, we were known as Racotek, Inc.
Basis of Reporting:The accompanying consolidated financial statements include the accounts of Camworks, which was acquired
Our fiscal year-end is December 29, 1999, Fusion which was acquired January 7, 2000, and QuickSilver, which was acquired during 1998 (see Note 4). The Camworks and Fusion transactions were accounted for by the pooling-of-interests method of accounting, and the QuickSilver acquisition was accounted for by the purchase method of accounting.31. All intercompanyinter-company accounts and balances have been eliminated in consolidation.
Use of Estimates:
The preparation of financial statements in accordance with auditing standards generally accepted in 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:
We 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. Revenues frompursuant to fixed bid contracts are recognized as the services are performedrendered based on the percent-of-completionpercentage-of-completion method (theof accounting (based on the ratio of hours incurred to total estimated hourshours) 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 to complete the contract). Revenue from time and materialmaterials 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.
Research and Development Costs:There were no software development costs capitalized during 2000, 1999 or 1998. There was no amortization expense relating to capitalized costs recognized for the years ended December 31, 2000, 1999, and 1998, respectively.
All 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 9), we did not incur any research and development expenses in 2000 and 1999.
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 to sevenfive years. Leasehold improvements are amortized on a straight-line basis over the shorter of the estimated useful lives of the assets or the underlying lease term (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.
We periodically assess the potential impairment of our intangible assets based on anticipated undiscounted cash flows from operations. No impairment charges were recorded in 2000, 1999 or 1998.
Income Taxes:
We 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 tax basesbasis of assets and liabilities
35
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:
We have chosen to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations (APB No. 25). We 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 of our 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 is antidilutive.anti-dilutive. Common stock options could potentially dilute basic earnings per share in future periods if we generate net income.
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
3. SELECTED BALANCE SHEET INFORMATION:
December 31, (in thousands) | |||
Accounts Receivable, Net: | 2000 | 1999 | |
Accounts receivable | $6,287 | $3,968 | |
Less allowance for bad debts | (429) | (309) | |
$5,858 | $3,659 | ||
Property and Equipment, Net: | |||
Computer equipment | $1,406 | $2,755 | |
Furniture and equipment | 694 | 996 | |
Leasehold improvements | 931 | 186 | |
3,031 | 3,937 | ||
Less accumulated depreciation and amortization | (1,381) | (2,869) | |
$1,650 | $1,068 | ||
Accrued Expenses: | |||
Payroll related | $720 | $1,537 | |
Vacation | 841 | 485 | |
Interest payable | 15 | 94 | |
Professional fees | 192 | 176 | |
Subcontractor fees | 154 | 141 | |
Other | 1,384 | 596 | |
$3,306 | $3,029 | ||
(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:
We maintain our corporate headquarters in Minneapolis, Minnesota and operating offices in Campbell and Pleasanton, California, Burlington, Massachusetts and Colorado Springs and Parker, Colorado under terms of noncancelablea non-cancelable operating leases,lease, which expire between October 2001 and June 2007. These leases requireexpires in December 2005. This lease requires us to pay a pro rata share of the lessor’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, we also have noncancelablenon-cancelable operating leases for furniture and equipment.
One of the leases requires us to maintain a restricted cash balance as security for our obligations under the lease. The remaining leases require us to provide security deposits as part of the lease agreement. deposits.
Total equipment rent and rentrental expense, including a pro rata share of the lessor'slessor’s operating costs, were $2,247,000, $971,000,$2,607,884, $3,546,144 and $380,000$2,247,000, for the years ended December 31, 2002, 2001 and 2000, 1999 and 1998, respectively.
38
Future minimum lease payments for office space and equipment under non-cancelable operating leases are as follows (in thousands):
Year Ending December 31 | Operating Leases | |
2001 | $3,914 | |
2002 | 3,840 | |
2003 | 3,565 | |
2004 | 3,103 | |
2005 | 2,688 | |
Later | 1,485 |
We are subleasing some of our office space commitments described above. These subleases expire between December 2002 and June 2003. Annual minimum lease payments due on these subleases are $942,000 in 2001, $975,000 in 2002, and $60,000 in 2003.
Year Ending December 31, |
| Operating Leases |
| |
|
|
|
| |
2003 |
| $ | 944 |
|
2004 |
| 747 |
| |
2005 |
| 388 |
| |
Total |
| $ | 2,079 |
|
4.5. NOTE RECEIVABLE:ACQUISITIONS
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.
Fusion Consulting, Inc.6. NOTES RECEIVABLE - RELATED PARTIES:
On January 7, 2000
As of December 31, 2001, we acquired Fusion Consulting, Inc. (“Fusion”)had notes receivable - related parties 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 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 front office package solutions provider based in$1.34 million charge related to the leases for our Campbell, California, and Colorado Springs, Colorado. AnColorado, 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 with 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. 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 80,001250,000 shares of our common stock was issued in exchange for allour 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), $1.173 million for facility closings and other lease termination costs, $87,000 to resolve a contract dispute with a vendor, and $28,000
39
of other related restructuring charges. No non-cash write-offs were incurred in connection with the restructuring charge. The facilities portion of the outstanding common stockrestructuring charge in the second quarter of Fusion. The transaction was accounted for as a pooling-of-interests,2001 includes new and accordingly, the accompanying financial statements have been restatedadditional lease termination costs and other expenses associated with our decisions to include the financial position and the results ofconsolidate our operations and cash flows of Fusion for all periods presented.
Merger-related expenses of approximately $60,000 were included in general and administrative expenses in 2000.
Camworks, Inc.
On December 29, 1999, we acquired Camworks, Inc. (“Camworks”), an e-business solutions provider basedclose unproductive or duplicative office locations in St. Paul, Minnesota. An aggregate of 1,000,000 shares of our common stock was issued in exchange for all of the outstanding common stock of Camworks. Fifty percent of these shares were restricted under lock-up agreements as of December 31, 2000. The lock-up agreements expire on a quarterly basis through 2001. This transaction was accounted for as a pooling-of-interests,Minnesota and accordingly, the accompanying financial statements have been restated to include the financial position, results of operationsPleasanton and cash flows of Camworks for all periods presented.Carlsbad, California.
Merger-related expenses of approximately $90,000 were included in general and administrative expenses in 1999.
The results of operations of the combined companies for 1999 and 1998 are as follows (in thousands):
Net revenues: | 1999 | 1998 | |
ZAMBA | $25,455 | $8,121 | |
Camworks | 2,582 | 1,190 | |
Fusion | 993 | 62 | |
$29,030 | $9,373 |
Net income (loss): | 1999 | 1998 | |
ZAMBA | $(1,898) | $(2,747) | |
Camworks | (109) | (38) | |
Fusion | (99) | 3 | |
$(2,106) | $(2,782) |
The QuickSilver Group, Inc.
On September 22, 1998, we acquired the QuickSilver Group, Inc. (“QuickSilver”), a CRM consulting company specializing in software package implementation for call center management, sales automation, marketing automation, and automated field service and sales. The acquisition was a tax-free reorganization under the Internal Revenue Code of 1986, and for financial statement purposes has been recorded using the purchase method of accounting. Our consolidated financial statements include the results of QuickSilver since September 22, 1998.
The purchase price consists of the following:
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 recorded in the following categories: people and experience, client references, client lists, and intellectual property and delivery methodology.
Pro Forma Results
The following table presents our consolidated results of operations for 1998 on an unaudited pro forma basis as if the QuickSilver acquisition had taken place at the beginning of each year:
5. NOTES RECEIVABLE:
Notes receivable includes amounts due from two customers. Payments on the notes are to be made on a quarterly basis through June 2001, with interest payable at 12% to 18%.
6. NOTES RECEIVABLE – RELATED PARTIES:
Notes receivable – related parties includes amounts due from employees, including one member of the Board of Directors. These notes are due through December 2004, with interest rates ranging from 6.15% to 9.0%.
7.NON-RECURRING ITEMS:
Non-recurring charges of $753,000 were $753,000recorded in 2000. The items consist of severance expenses for recently departed 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. At
Restructuring activities through December 31, 2000, $410,0002002, were as follows:
|
| Facility Closings |
| Severance and |
| 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 |
| 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 |
| — |
| 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 furniture as set forth more fully in Note 17 is includedtechnically an “Event of Default” under the Accounts 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 accrued liabilities and $263,000 is included in current maturities of long-term debt.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 amounts are expected to be paid out byamount 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 $5.0 million based
40
on eligible collateral. Borrowings under this line of credit bore interest at the bank’s prime rate plus 2.0%, and were 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.
8.9. 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 additional shares of our NextNet stock. Entrx also agreed to waive interest charges after December 2003.
The 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 the lesser of $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 price adjustments set forth in the NextNet 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% and is payable monthly. Principal and accrued interest underthis note will be converted to NextNet stock on or before March 31, 2003.
Entrx also has the right to appoint one representative to become a member of our Board of Directors.
10. NOTES PAYABLE:LONG-TERM DEBT:
As part of thea 1998 acquisition of QuickSilver, Inc., we issued $2.16 million in promissory notes payable. Interest on the notes is computed at 7% to 10% of the outstanding balance and is paiddue quarterly on the final day of each quarter, commencing December 31, 1999, and ending December 31, 2003.September 30, 2004. Principal payments are due quarterly, on the last day of each quarter in 16 equal installments, commencing December 31, 1999.installments. Holders may request to convert their notes to our common stock. Conversion is computed at fair market value, and is at the sole and absolute discretion of our Board of Directors. No notes were converted to common stock during 2002, 2001 or 2000. During 1999, $104,000 of the principal value of the notes and $4,000 of accrued interest payable related to such notes were converted into 46,119 shares of our common stock.
As part of the acquisitions of QuickSilver and Camworks, we
We also acquiredhad debt related to loan obligations.obligations from other acquisitions. Loan payments arewere made monthly and consistconsisted of principal and interest, which iswas computed at a rates ranging between 6.0%8.5% and 10.5%10.0%. OfThe remainder of these obligations $19,000 are payable in 2001 and $13,000 are payablewas paid in 2002.
In September 1998, we purchased software and support for $413,000. Of this obligation, $160,000 is payable in January 2001 and $103,000 is due in September 2001.
Aggregate annual maturities of notes payable,the long-term debt, subsequent to December 31, 2000,2002, are as follows:
Year Ending December 31 | Payments on Notes | ||
(in thousands) | |||
2001 | $607 | ||
2002 | 274 | ||
2003 | 195 | ||
Year Ending December 31 |
| Payments on Notes |
| |
|
| (in thousands) |
| |
2003 |
| $ | 266 |
|
2004 |
| 164 |
| |
41
Approximately $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 for interest charges was $148,000, $32,000a termination payment of $165,000 and $37,000a transfer of 16,667 shares of our Series A Preferred Stock in 2000, 1999 and 1998, respectively.NextNet. 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 this individual.
9.11. NEXTNET:
On September 21, 1998, we transferred our “NextNet” wireless data technology to an entity now known as NextNet Wireless, Inc. We have(“NextNet”), and certain of our employees became NextNet employees. In exchange for this technology, we received an investmentequity stake in NextNet Wireless, which isWireless. Our equity holdings are carried at $0 (the historical carrying basisbecause of the technology transferred), because all amounts that we spent through the date of transferuncertainty surrounding our ability to develop the technology were charged as incurred to research and development expense.realize value from them. We do not have any obligationsobligation to provide further funding for this 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, 20002002, we have recorded $25,200 as a deferred gain on sale of investment. We will report the gain 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 1999,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 ownedwere 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 one-third$600,000 by mid-to-late April for payroll and other immediate cash needs. The larger 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 at
42
$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 |
| Cash |
| |
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.
10.12. 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 was 2,948,590, 1,763,4066,244,603, 3,508,045, and 3,107,226,2,948,590, as of December 31, 2002, 2001 and 2000, 1999 and 1998, respectively.
Options become exercisable over periods of up to four years from the date of grant and expire within ten years from date of grant.
The following table details option activity:
Options | Price Per Option | Weighted Average Exercise Price | |
Balances, December 31, 1997 | 3,450,265 | $0.2000- 12.6250 | $2.69 |
Granted | 6,061,492 | 1.5000- 4.3250 | 1.93 |
Exercised | (143,330) | 0.2000- 3.2500 | 1.38 |
Canceled | (3,090,228) | 1.5000- 7.2500 | 2.75 |
Balances, December 31, 1998 | 6,278,199 | $0.2000- 12.6250 | 1.83 |
Granted | 3,283,950 | 1.5630- 11.2970 | 3.06 |
Exercised | (497,520) | 0.2900- 3.7500 | 1.47 |
Canceled | (1,283,484) | 0.4200- 5.0000 | 1.87 |
Balances, December 31, 1999 | 7,781,145 | $0.2000- 12.6250 | 2.44 |
Granted | 6,381,391 | $2.5312- 20.1250 | 5.21 |
Exercised | (965,092) | 0.2000- 2.6875 | 1.50 |
Canceled | (1,513,575) | 0.4200- 20.1250 | 6.82 |
Balances, December 31, 2000 | 11,683,869 | $0.2000- 20.1250 | 3.50 |
Options exercisable at December 31, 2000 | 3,592,444 | $0.2000-12.6250 | $2.37 |
On October 13, 1998, we repriced outstanding stock options held by an officer to the market value of our stock as of that date. In connection with the repricing of those stock options, the 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 per share, were repriced to $1.75 per share.
On January 20, 1998, we repriced outstanding stock options held by officers to the market value of our stock as of that date. In connection with the repricing of those stock options, the 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 per share, were repriced to $2.00 per share.44
|
| Options |
| Price Per |
| Weighted |
| ||
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 |
|
No compensation cost has been recognized for stock options granted to employees or directors under our 1989 Stock Option Plan, 1993 Equity Incentive Plan, 1993 Directors Option Plan, 1997 Stock Option Plan, 1998 Non-Officers Plan, 1999 Non-Officers Plan, 2000 Non-Officers Plan, or 2000 Non-Qualified Plan (collectively referred to as the “Plans”). Had compensation cost for the Plans been determined based on the fair value of options at the grant date for awards in 2000, 1999,2002, 2001, and 1998,2000, our net loss and net loss per share would have increased to the pro forma amounts indicated below:
(In thousands, except per share amounts)
2000 | 1999 | 1998 | ||
Net loss | As reported | $(2,676) | $(2,106) | $(2,782) |
Pro forma | (9,004) | (4,644) | (5,017) | |
Net loss per share - | As reported | (.08) | (.07) | (.10) |
Basic and diluted | Pro forma | (.29) | (.15) | (.20) |
In relation to the option repricing described previously, the above proforma compensation expense includes $120,000 for 1998.
|
| 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 2000, 1999,2002, 2001, and 1998,2000, respectively, was $8.37 million, $3.35 million,$603,000, $150,000, and $3.53$8.37 million for the 1993 Equity Incentive Plan, $17,000, $69,000, and $1.90 million $163,000, and $47,000 for the 1993 Directors Option Plan, $94,000, $0, and $1.85 million, $3.10 million, and $687,000 for the 1998 Non-Officer Option Plan, $0,$14,000, $0, and $351,000$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., $5.04 million, $2.58 million, and $0 for the 1999 Non-Officer Plan, $6.51 million, $0, and $0 for the 2000 Non-Officer Plan, and $5.71 million, $0, and $0 for the 2000 Non-Qualified Option 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:
Assumptions | 2000 | 1999 | 1998 |
Risk-free interest rates | 5.52%-6.76% | 4.59%-6.30% | 4.18%-5.71% |
Volatility | 133% | 112% | 79% |
Expected lives (months) | 60 | 60 | 60 |
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, 2000:2002:
Options Outstanding | Options Exercisable | |||||
Range of Exercise Prices | Number Outstanding at December 31, 2000 | Weighted-Average Remaining Contractual Life | Weighted- Average Exercise Price | Number Exercisable at December 31, 2000 | Weighted- Average Exercise Price | |
$0.20 - | .84 | 291,541 | 2.67 | $0.37 | 287,564 | $0.37 |
1.50 - | 2.38 | 4,133,174 | 7.61 | 1.85 | 2,278,948 | 1.82 |
2.44 - | 3.88 | 4,392,276 | 9.25 | 3.18 | 608,397 | 2.98 |
4.00 - | 5.97 | 1,912,678 | 8.81 | 4.94 | 331,160 | 4.75 |
6.00 - | 20.13 | 954,200 | 9.13 | 10.05 | 86,375 | 9.49 |
45
|
| Options Outstanding |
| Options Exercisable |
| |||||||||
Range of |
| Number |
| Weighted- Average |
| Weighted- |
| Number |
| Weighted- |
| |||
$ | 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 |
|
|
| |||
Stock-Based Compensation:Non-cash compensation charges consist mainly of expenses associated with Camworks stock
We granted to Camworks employees prior to the merger under pre-existing change of control provisions within their employment agreements. These stock grants represented a one-time charge to 1999 earnings of $325,000. We also granted 161,700213,000 stock options to non-shareholder employees of Camworks and Fusion following our acquisition of Camworks.these companies. The options were granted with an exercise price less than fair market value as an incentive to employees to continue employment with us. DeferredNon-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 recognized over ain 2003 (remainder of the four-year vesting period,period), based upon the intrinsic value method in accordance with APB No. 25.
Preferred Stock:
Our FourthFifth Amended and Restated Certificate of Incorporation authorizes issuance of up to 5.0 million preferred shares with a par value of $0.01 per share and allows our Board of Directors, without obtaining stockholder approval, to issue such preferred stock. In October 1998, 1.0 million shares of preferred stock were purchased by our then-chairman 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, 2000,2002, 2001, or 1999.2000.
Warrants:
We sold some of our common stock on three occasions during the first quarter of 2002. In connection with our acquisitioneach of QuickSilver,these sales or group of sales, we issued warrants to purchase QuickSilveradditional 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 convertedissued at 90% of the average closing bid price for our common stock for the twenty trading days prior to 462,247the 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
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 |
| February 1, 2002 |
| February 22, 2002 |
|
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. Thesestock 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 establishment of the credit facility, we issued a warrant to purchase 35,000 shares of our common stock at an exercise price of $2.80 per share to Silicon 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 purchase an additional 35,000 shares of our common stock 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, were exercised 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 |
| August 2, 2001 |
| December 31, 2001 |
|
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 rights are outstanding as of December 31, 2000.2002 or 2001.
A summary of the warrants outstanding at December 31, 2002 is as follows:
|
| Date |
| Date |
| Number of |
| Exercise |
| |
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 Rights Plan.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, unless we extend the expiration date, redeem the Rights or exchange 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 our Common Stockcommon stock and will not trade separately. If a person or a group acquires 20 percent or more of our common stock (an "Acquiring Person"“Acquiring Person”) or announces an intention to make a tender offer for 20 percent or more of our 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 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 our common stock at a substantially discounted price in lieu of the preferred stock. Additionally, if, after the Distribution Date, we merge into or engage in certain other business combination transactions with an Acquiring Person or 50 percent or more of itsour 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.
After a person or a group has become an Acquiring Person, our 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 of our common stock per Right. The boardBoard also has the right to
48
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 our Board of Directors in certain circumstances.
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 92,000156,000 shares have beenwere issued under the ESPP.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.
11.13. INCOME TAXES:
We have incurred net operating losses since our inception in 1990. Because of the uncertainty about whether we will have taxable earnings in the future, we have not reflected any benefit of such net operating loss carryforwards in the accompanying consolidated financial statements.
As of December 31, 2000,2002, we have approximately $72.4$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 any one-yearone year may be limited under Internal Revenue Code Section 382 due 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 follows:
2000 | 1999 | |
Expected federal benefit | $(910,000) | $(683,000) |
Change in valuation allowance | 1,025,000 | (752,000) |
State taxes, net | (210,000) | 764,000 |
Amortization | 960,000 | 1,276,000 |
Stock compensation | (951,000) | (563,000) |
Other | 86,000 | (42,000) |
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, 20002002 and 1999.2001.
The tax effect of items that comprise a significant portion of deferred tax assets is:
2000 | 1999 | |
Deferred tax assets: | ||
Net operating loss carryforwards | $28,240,000 | $27,354,000 |
Tax credits | 750,000 | 720,000 |
Other, principally depreciation and amortization | 785,000 | 676,000 |
Valuation allowance | (29,775,000) | (28,750,000) |
Net deferred tax asset | $- | $- |
Due to the uncertainty surrounding the timing of realizing the benefits of favorable tax attributes in future tax returns, we have placed a valuation allowance against our otherwise recognizable deferred tax assets.
49
|
| 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 |
| $ | — |
| $ | — |
|
12.14. EMPLOYEE SAVINGS PLAN:
We 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. We may make an employer contribution to the 401(k) plan at the discretion of our Board of Directors. We have not made any employer contributions to the 401(k) plan to date.
13.15. MAJOR CUSTOMERS:
A portion of our revenues have been derived from significant customers for the years ended December 31, 2000, 19992002, 2001 and 19982000 as follows:
2000 | 1999 | 1998 | |
Customer 1 | 1% | 6% | 16% |
Customer 2 | 16% | 2% | 0% |
|
| 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 | % |
14.16. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amount for cash and cash equivalents and long-term debt approximates fair value because of the short maturity of those instruments.
15.17. LITIGATION:
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 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 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 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 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 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 termination of the lease and a release of Fidelity’s claims. As of December 31, 2002, we have paid $60,000 of the settlement amount and the remaining $60,000 is included in accrued expenses on the balance sheet.
18. SUBSEQUENT EVENT: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 approximately $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 27, 2001,17, 2003, we establishedentered 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 secured revolving credit facilitytotal of up to a maximum of $5,000,000 based on eligible accounts receivable. Borrowings under this line of credit bear interest at the bank’s prime rate plus 2.0%, and is payable monthly. This agreement requires, among other things, that we maintain certain financial covenants and levels of tangible net worth. The facility is renewable annually.
$750,000. In connection with the credit facility,this sale, we issued five-year warrantsa warrant to an investor affiliated with a prior purchaser of NextNet shares from us to purchase 35,000125,000 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.
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 priceterminated its option to purchase additional shares of $2.80 per share, exercisable upon issuance. The warrants can be exercised until their expiration date of February 27, 2006.our NextNet stock, and agreed to waive interest charges that might otherwise accrue after December 2003.
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, 2000 | ||||
Allowance for doubtful accounts (deducted from accounts receivable) | $309 | $965 | ($845) | $429 |
Year ended December 31, 1999 | ||||
Allowance for doubtful accounts (deducted from accounts receivable) | 228 | 179 | (98) | $309 |
Year ended December 31, 1998 | ||||
Allowance for doubtful accounts (deducted from accounts receivable) | 238 | 0 | (10) | 228 |
51
Zamba Corporation
Valuation and Qualifying Accounts
(in thousands)
Column A |
| Column B |
| Column C |
| Column D |
| Column E |
| ||||
Description |
| Balance at |
| Additions |
| Deductions |
| Balance at |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Year ended December 31, 2002 |
| $ | 183 |
| $ | 20 |
| $ | (59 | ) | $ | 144 |
|
|
|
|
|
|
|
|
|
|
| ||||
Year ended December 31, 2001 |
| 429 |
| 275 |
| (521 | ) | 183 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Year ended December 31,2000 |
| 309 |
| 965 |
| (845 | ) | 429 |
| ||||
52
SIGNATURES
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 | By | /s/ Norman D. Smith | |||
Norman D. Smith | |||||
President and Chief Executive Officer |
Each person whose signature appears below constitutes and appoints Doug HoldenNorman 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 sign amendments to this 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 | Title | Date | ||
/s/ Norman D. Smith | President and Chief | March | ||
Norman D. Smith | Executive Officer (Principal | |||
Executive Officer) | ||||
/s/ Michael H. Carrel | Executive Vice President | March | ||
Michael H. Carrel | and Chief Financial Officer | |||
(Principal Financial and | ||||
Accounting Officer) | ||||
OTHER DIRECTORS: | ||||
/s/ Joseph B. Costello | Chairman of the Board | March | ||
Joseph B. Costello | ||||
/s/ Dixon R. Doll | Director | March 31, 2003 | ||
Dixon R. Doll | ||||
/s/ Paul D. Edelhertz | Director | March 31, 2003 | ||
Paul D. Edelhertz | ||||
/s/ Sven A. Wehrwein | Director | March | ||
Sven A.Wehrwein |
53
I, Norman D. Smith, 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: | March 31, 2003 | |
/s/ Norman D. Smith | ||
Chief Executive Officer |
54
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: | March 31, 2003 | |
/s/ Michael H. Carrel | ||
Chief Financial Officer |
55