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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
COMMISSION FILE NUMBER 0-22718
ZAMBA CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE #41-1636021
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7301 OHMS LANE, SUITE 200, MINNEAPOLIS, MINNESOTA 55439
(Address of principal executive offices, including zip code)
(612) 832-9800
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
-------- ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class November 2, 1998
----- ------------------
Common Stock, $0.01 par value 27,420,837
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THIS REPORT CONSISTS OF 16 SEQUENTIALLY NUMBERED PAGES.
ZAMBA CORPORATION
INDEX
PART I -- Financial Information
Item 1. Financial Statements PAGE NO.
Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 1998, and 1997 3
Consolidated Balance Sheets as of
September 30, 1998, and December 31, 1997 4
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1998, and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
Item 3. Not Applicable
PART II -- Other Information
Items
1-6. Not applicable 15
Signatures 16
2
PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
ZAMBA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- ---------------------------
1998 1997 1998 1997
--------------- -------------- ------------- ------------
NET REVENUES:
SERVICES $1,383 $883 $4,102 $3,503
PRODUCTS 250 153 345 714
--------------- -------------- ------------- ------------
1,633 1,036 4,447 4,217
COSTS AND EXPENSES:
PROJECT COSTS 918 1,261 2,381 3,488
PRODUCT COSTS 4 588 20 1,199
RESEARCH AND DEVELOPMENT 258 889 1,163 2,878
SALES AND MARKETING 436 942 1,493 3,616
GENERAL AND ADMINISTRATIVE 344 1,310 834 2,211
--------------- -------------- ------------- ------------
LOSS FROM OPERATIONS (327) (3,954) (1,444) (9,175)
INTEREST INCOME 69 120 201 354
--------------- -------------- ------------- ------------
NET LOSS ($258) ($3,834) ($1,243) ($8,821)
=============== ============== ============= ============
NET LOSS PER SHARE - BASIC AND DILUTED ($0.01) ($0.15) ($0.05) ($0.35)
=============== ============== ============= ============
WEIGHTED AVERAGE SHARES OUTSTANDING 25,315 24,932 25,122 24,912
=============== ============== ============= ============
The accompanying notes are an integral part of the
consolidated financial statements.
3
ZAMBA CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------------ ------------------
(UNAUDITED)
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $2,702 $3,103
SHORT-TERM INVESTMENTS - 2,233
ACCOUNTS RECEIVABLE, NET 2,120 561
PREPAID EXPENSES AND OTHER CURRENT ASSETS 752 195
------------------ ------------------
TOTAL CURRENT ASSETS 5,574 6,092
PROPERTY AND EQUIPMENT, NET 879 786
RESTRICTED CASH 200 355
INTANGIBLE ASSETS 7,958 -
OTHER LONG-TERM ASSETS 77 4
------------------ ------------------
TOTAL ASSETS $14,688 $7,237
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
LONG-TERM DEBT, CURRENT PORTION $ 120 $ -
ACCOUNTS PAYABLE 677 6
ACCRUED EXPENSES 1,354 651
DEFERRED REVENUE 200 303
------------------ ------------------
TOTAL CURRENT LIABILITIES 2,351 960
------------------ ------------------
LONG-TERM DEBT 2,218 -
------------------ ------------------
COMMITMENTS
STOCKHOLDERS' EQUITY :
COMMON STOCK, $0.01 PAR VALUE, 35,000 SHARES
AUTHORIZED, 27,421 AND 24,999 ISSUED AND
OUTSTANDING AT SEPTEMBER 30, 1998, AND
DECEMBER 31, 1997, RESPECTIVELY 274 250
ADDITIONAL PAID-IN CAPITAL 76,176 71,265
ACCUMULATED DEFICIT (66,331) (65,088)
PROMISSORY NOTE RECEIVABLE FROM STOCKHOLDER - (150)
------------------ ------------------
TOTAL STOCKHOLDERS' EQUITY 10,119 6,277
------------------ ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $14,688 $7,237
================== ==================
The accompanying notes are an integral part of the
consolidated financial statements.
4
ZAMBA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS) NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------------
1998 1997
------------ --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS ($1,243) ($8,821)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
USED IN OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 363 899
LOSS ON DISPOSAL OF FIXED ASSETS 48 519
FORGIVENESS OF PROMISSORY NOTE RECEIVABLE
FROM SHAREHOLDER 150 -
PROVISION FOR BAD DEBTS 13 90
WRITE-DOWN OF INVENTORIES - 207
AMORTIZATION OF DISCOUNTS ON INVESTMENTS (17) (9)
STOCK ISSUED FOR CONSULTING SERVICES - 80
CHANGES IN OPERATING ASSETS AND LIABILITIES:
ACCOUNTS RECEIVABLE 22 637
INVENTORIES - 167
PREPAID EXPENSES AND OTHER CURRENT ASSETS 168 199
CURRENT LIABILITIES (533) 336
------- -------
NET CASH USED IN OPERATING ACTIVITIES (1,029) (5,696)
CASH FLOWS FROM INVESTING ACTIVITIES:
PURCHASE OF INVESTMENTS (2,327) (1000)
PROCEEDS FROM MATURITY OF INVESTMENTS 4,577 7,000
PURCHASE OF EQUIPMENT (56) (102)
PROCEEDS FROM SALE OF FIXED ASSETS 50 -
ACQUISITION, NET OF CASH ACQUIRED (1,888) -
OTHER (18) (48)
------- -------
NET CASH PROVIDED BY INVESTING ACTIVITIES 338 5,850
CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS FROM EXERCISES OF STOCK OPTIONS 135 243
CHANGE IN RESTRICTED CASH 155 115
------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES 290 358
------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS (401) (512)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,103 2,956
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,702 $ 3,468
======= =======
The accompanying notes are an integral part of the
consolidated financial statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A. Basis of Presentation:
The unaudited consolidated financial statements of Zamba Corporation as of
September 30, 1998, and for the three and nine month periods then ended
include the accounts of Zamba Corporation and its wholly-owned subsidiary,
QuickSilver Group, Inc. All intercompany accounts and transactions have been
eliminated in consolidation. The unaudited consolidated financial statements
of Zamba Corporation ("Zamba" or the "Company") as of September 30, 1998, and
for the three and nine month periods ended September 30, 1998, and 1997,
reflect, in the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to fairly state our financial
position as of September 30, 1998, and our results of operations and cash
flows for the reported periods. The results of operations for any interim
period are not necessarily indicative of the results to be expected for any
other interim period or for the full year. The year-end balance sheet data
was derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles. These
financial statements should be read in conjunction with our audited financial
statements and related notes for the year ended December 31, 1997, which were
included in our 1997 Annual Report to Shareholders on Form 10-K.
Effective January 1, 1998, we adopted Statement of Position (SOP) 97-2,
"Software Revenue Recognition." The adoption of SOP 97-2 has had no effect on
our revenue recognition practices or any impact on our financial position or
results of operations.
Note B. Net Loss per Share:
Effective December 31, 1997, we adopted Statement of Financial Accounting
Standards No. 128, "Earnings per Share," and we have disclosed basic and
diluted net loss per share for the three and nine-month periods ended
September 30, 1998, and 1997 in accordance with this standard. We incurred
net losses for these periods in 1998 and 1997, and excluded common equivalent
shares from the diluted loss per share computation, because their effect is
anti-dilutive. At September 30, 1998, we had 6,390,607 stock options and
462,247 warrants outstanding, which may be dilutive in future periods.
6
Note C. Selected Balance Sheet Information:
(in thousands) September 30, 1998 December 31, 1997
------------------ -----------------
(Unaudited)
Accounts receivable, net:
Accounts receivable $2,370 $785
Less allowance for doubtful accounts (250) (224)
------- ------
$2,120 $561
======= ====
Property and equipment, net:
Computer equipment $2,109 $1,453
Furniture and equipment 422 679
Leasehold improvements 186 106
------- ------
2,717 2,238
Less accumulated depreciation and
Amortization (1,838) (1,452)
------- ------
$879 $786
======= ====
Note D. Acquisition:
On September 22, 1998, we completed the 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
sales. We paid cash of $1,888,000, net of cash acquired, issued $2,161,675 in
promissory notes payable, and issued 2,337,992 shares of Common Stock in
exchange for all the outstanding shares of QuickSilver. Interest on the notes
is computed at 7% of the outstanding balance and is paid quarterly on the
final day of each quarter, commencing December 31, 1999, and ending December
31, 2003. Principal shall be paid quarterly on the last day of each quarter
in 16 equal installments, commencing December 31, 1999. Holders may request
conversion of their notes to common stock of Zamba. Conversion is at the sole
and absolute discretion of Zamba's Board of Directors. Stock options and
warrants to purchase QuickSilver common stock were converted to 912,847
options and 462,247 warrants to purchase Zamba Common Stock. The acquisition
is intended to be a tax-free reorganization under the Internal Revenue Code
of 1986, and is being accounted using the purchase method of accounting. The
excess of the purchase price over the fair value of the net assets acquired
was $7,958,000, of which $700,000 reflects the estimated fair value of
QuickSilver's assembled workforce, which is being amortized on a
straight-line basis over 4 years, and $7,258,000 was allocated to goodwill,
which is being amortized on a straight-line basis over 10 years. The
QuickSilver operating results are included in our income statement
information from September 22, 1998. The revenue and net loss of QuickSilver
from September 22, 1998, through September 30, 1998, was $146,000 and
$39,000, respectively. The table below reflects the pro forma income
statement information of the Company and QuickSilver assuming that the
acquisition had taken place as of the beginning of each of the periods
presented.
7
ZAMBA CORPORATION
PROFORMA COMBINED CONDENSED INCOME STATEMENT INFORMATION
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997
-------------- --------------
NET REVENUES: 10,236 8,605
NET LOSS ($4,386) ($9,316)
=============== ==============
NET LOSS PER SHARE - BASIC AND DILUTED ($0.16) ($0.34)
=============== ==============
WEIGHTED AVERAGE SHARES OUTSTANDING 27,382 27,250
=============== ==============
This unaudited pro forma combined condensed income statement information has
been prepared for informational purposes only and may not be indicative of
the operating results that actually would have resulted had the acquisition
been made at the beginning of the periods presented, or of the operating
results that may occur subsequent to the acquisition.
Note E. Subsequent Events:
On October 13, 1998, our Board of Directors approved the
authorization of Twenty Million (20,000,000) additional shares of Common
Stock, subject to the approval of our shareholders.
On October 26, 1998, we issued 1,000,000 shares of Series A Junior
Convertible Participating Preferred Stock to our Chairman for $2,000,000. The
convertible Preferred Stock will automatically convert to Common Stock on a
1-to-1 basis pending shareholder approval to authorize the additional
20,000,000 shares approved by our Board of Directors.
In October 1998, we agreed to terminate a non-binding letter of
intent to acquire Logical Information Systems, Inc. ("LIS").
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Zamba ("Zamba" or the "Company") is a national dedicated customer
care consulting company. Our services are designed to assist clients in
building lasting relationships with customers, increase the effectiveness of
customer service and sales operations and improve overall communication with
customers. We deliver our services using a unique combination of accumulated
expertise in the customer care field, existing technology, and client
knowledge. Typically, we perform our services on a fixed-bid, fixed-timetable
basis. We also perform some services on a time and expenses basis. Under
either method, rapid development and significant client involvement are key
aspects to our methodologies. We offer our clients end-to-end assistance with
their implementations, including business case evaluation, system planning
and design, software implementation, modification and development, training,
installation, change management, network management, and on-going support.
Our services include the design, implementation and integration of several
enterprise level applications to facilitate sales automation, call center
management, marketing automation and automated field service and sales.
In 1997, we completed our exit from SMR hardware operations,
discontinued support for SMR technologies, except on a time and materials
basis, closed several facilities, disposed of assets no longer used in
operations, hired personnel with skills and experience in field service and
customer care, and eliminated personnel with skills related to our previous
operations. These actions reduced our workforce from approximately 95
employees to approximately 40 employees, and reduced our operating costs
significantly.
During the second half of 1997 and the first quarter of 1998, we
broadened our sales focus from providing systems integration services for
field service workers to providing such services for all aspects of its
clients' enterprises that affect their customers, which we refer to as
"customer care." On September 22, 1998, we continued our growth into customer
care with our acquisition of the QuickSilver Group, Inc. ("QuickSilver"), a
Cupertino, California based customer care consulting company specializing in
software package implementation for call center management, sales automation,
marketing automation, and automated field service and sales.
In combination with QuickSilver, we have successfully implemented
more than 75 customer care solutions for Fortune 500 clients, such as
Ameritech, Bay Networks, Cisco, 3-Com, Compaq, Hertz, Hewlett-Packard,
Honeywell, MCI, Progressive Insurance, Qualcomm, SHL Systemhouse, Symbol
Technologies, Wang, and Xerox. We have also established key partnerships with
leading customer care product suppliers, such as Calico Technology, Clarify,
and CrossWorlds, to provide integrated solutions to our clients. Many of our
clients come from referrals by our partners, and we also obtain clients
through the efforts of our dedicated national sales force. Our offices are in
Minneapolis, Minnesota; Cupertino and Pleasanton, California; Boston,
Massachusetts; and satellite locations.
On September 21, 1998, we transferred our patented "NextNet"
wireless data technology to an entity of the same name, in conjunction with
the receipt by that entity of Eight Million Dollars ($8,000,000) in private
investment capital to fund the further development of the technology. In
concept, the NextNet technology will enable high-speed data transmission over
existing cellular infrastructures at rates not possible with existing
systems. We retained Forty-four percent (44%) ownership of NextNet, but we
expect that the third quarter will be the final quarter in which we
contribute financially to the development of the technology. Therefore, the
fourth quarter will be the first quarter in which the expenses incurred to
develop NextNet will not impact our financial results. Several long-time
employees of the Company also transferred to NextNet. These employees were
previously engineers who worked on our legacy software for wireless data
communication known as "KeyWare" and our earlier computing devices for
specialized mobile radio (SMR).
Due to our broadened focus on customer care consulting services,
including the acquisition of QuickSilver and the transfer of the NextNet
technology to the separate entity, we expect to derive an increasing
percentage of our revenues from customer care services.
9
Our third quarter revenues were $1,633,000, an increase of $597,000
over the $1,036,000 recorded during the third quarter of 1997. For the nine
months ended September 30, 1998, our revenues were $4,447,000, which is
$230,000 more than the $4,217,000 in revenues attained during the first three
quarters of 1997. Our net loss during the third quarter was $258,000, which
is an improvement of $3,576,000 over the $3,834,000 net loss incurred in the
comparable quarter last year, and our net loss of $1,243,000 for the nine
months ended September 30, 1998, is an improvement of $7,578,000 over the
$8,821,000 net loss recorded for the comparable period during 1997. Expenses
for NextNet during the third quarter of 1998 were $258,000. The third quarter
results include the results for QuickSilver for the period between September 22
and September 30, 1998.
We expect to incur moderately higher losses during the fourth
quarter, as we incur costs for recruiting personnel and developing our
infrastructure, which we feel are necessary to grow revenues from customer
care services during the fourth quarter and in future quarters. There also
may be costs resulting from the integration of Zamba and QuickSilver that are
outside our control and may not be foreseen. These risks may include cultural
differences; efforts required by management to integrate the companies,
resulting in a distraction from other Company business; perceived changes by
clients in terms of our service standards, business focus, billing practices
or service offerings; and costs and delays in integrating our consulting
staffs and technology infrastructure.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998, COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1997
Revenues increased 58% to $1,633,000 in 1998, compared to $1,036,000
recorded during the third quarter of 1997. 1998 revenues include $1,383,000
from services, an increase of 57% over the $883,000 recorded during 1997, and
$250,000 from products, an increase of 63% from the $153,000 recorded during
1997. The increase in service revenues was due to an increased market
acceptance of the Company's services and the acquisition of QuickSilver,
which contributed $146,000 in revenue. The increase in product revenues was
due to a significant software licensing transaction of $230,000 of KeyWare.
Project costs are primarily the costs of payroll and related
expenses for employees and contractors working on client projects. Our
project costs were $918,000 in 1998, a decrease of $343,000 from the
$1,261,000 in project costs incurred in 1997. As a percentage of total
revenues, project costs significantly improved during 1998, from 122% to 56%
of total revenues. The decrease results from the 57% increase in service
revenues in 1998 and the cost reduction measures taken during 1997, when we
significantly changed our workforce to focus on customer care instead of our
legacy wireless data software and SMR hardware. Project costs may increase
over the next few quarters, as we incur costs for recruitment and to improve
our infrastructure. Long-term,
10
if our investments in personnel and infrastructure result in increased
revenues, we expect project costs to be a lower percentage of revenues.
Product costs are the direct costs incurred to deliver KeyWare and
SMR products to our product customers. Product costs in 1998 were $4,000, a
decrease of $584,000 from the $588,000 in product costs in 1997. The decrease
in product costs resulted primarily from our discontinuance of SMR and
wireless software product development and purchasing activities in the third
quarter of 1997, as part or our change in focus to customer care consulting
services.
Research and development expenses were $258,000 and $889,000 in 1998
and 1997, respectively. The decrease of $631,000 is due to the staff
reductions in the third quarter of 1997. The 1998 expenses represent costs we
incurred to develop NextNet before we transferred the technology to a
separate entity, also known as NextNet, on September 21, 1998. Due to the
transfer of the technology, we expect research and development costs to
significantly decrease during the fourth quarter.
Sales and marketing expenses were $436,000 during 1998 and $942,000
in 1997. The decrease of $506,000 is due to the cost reductions taken during
the third quarter of 1997. As a percentage of revenues, sales and marketing
expenses were 27% and 91% during 1998 and 1997, respectively. Sales and
marketing expenses as a percentage of revenues will be higher during the
fourth quarter, as we have hired several additional direct sales personnel
who, due to the typically long lead times required to obtain large revenue
opportunities, may not become fully productive until after the fourth quarter
of 1998.
General and administrative expenses were $344,000 during 1998, a
decrease of $966,000 from the $1,310,000 recorded in 1997. General and
administrative expenses represent 21% and 126% of total revenues during 1998
and 1997, respectively. The decreases measured both by dollars and
percentages result from the reduction of personnel in the third quarter of
1997 and our elimination of several unnecessary facilities over the preceding
12 months, including a significant reduction of square footage in our
headquarters in Minneapolis. We will continue to manage our overhead
expenses, but we do expect general and administrative costs to increase
during the fourth quarter, primarily because we opened a new office in
Pleasanton, California, on October 1, 1998, which will increase our
facilities expenses. Additionally, the investment in technology
infrastructure that we are making over the next few quarters will cause
general and administrative costs to temporarily increase on a percentage
basis. General and administrative expenses will also increase in the future
due to the amortization of goodwill and the intangible asset recorded in
connection with the QuickSilver acquisition.
Interest income decreased $51,000 to $69,000 in 1998 from the
$120,000 received in 1998. Our interest income is primarily derived from cash
and cash equivalents and short-term investments, and the reduction from 1997
to 1998 directly relates to our decreased balances of these assets.
11
NINE MONTHS ENDED SEPTEMBER 30, 1998, COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1997
Revenues were $4,447,000 in the first three quarters of 1998, a 5%
increase from the $4,217,000 recorded in comparable period of 1997. Service
revenues increased 17% from $3,503,000 in 1997 to $4,102,000 in 1998, whereas
product revenues decreased 52% from $714,000 in 1997 to $345,000 in 1998.
Both the increase in service revenues and the decrease in product revenues
relate to the changes undertaken by Zamba during the past four quarters,
including the increased focus on customer care solutions and the reduction in
personnel during 1997. We expect service revenues to increase and make up a
large percentage of total revenues in the fourth quarter and thereafter.
Total cost of revenues was $2,401,000 in 1998, a decrease of 49%
from the $4,687,000 recorded in 1997. Project costs of $2,381,000 in 1998
represent a 32% decrease from the $3,488,000 recorded in 1997, and product
costs were $20,000 in 1998, a decrease of 98% from the $1,199,000 in 1997.
Project costs improved in 1998 to 58% of service revenues from 100% in 1997.
Product costs improved in 1998 to 6% of product revenues from 168% in 1997.
These improvements are due to the strategic changes and cost reductions
undertaken during the third quarter of 1997 as we changed our focus to
customer care consulting.
Research and development costs decreased 60% to $1,163,000 in 1998
from $2,878,000 in 1997. This decrease results from the cost reductions in
1997. Our customer care business model requires little or no spending for
research and development, as compared to the requirements for our legacy
hardware and software businesses. With the transfer of the NextNet technology
to another entity now completed, we expect either a significant or total
elimination of this expense in the fourth quarter.
Sales and marketing expenses were $1,493,000, a 59% decrease from
the $3,616,000 recorded in 1997. The decreases in these costs resulted
primarily from the cost reduction measures taken during 1997.
General and administrative expenses decreased 62% in 1998, to
$834,000 in 1998 from $2,211,000 in 1997. As a percentage of revenue, general
and administrative costs decreased from 52% in 1997 to 19% in 1998. The
decrease results from the 1997 cost reductions and subsequent facility
eliminations.
Interest income was $201,000 in 1998, a decrease of 43% from the
$354,000 received in 1997. The decrease in interest income is primarily the
result of a decrease in the amount of our holdings of cash and cash
equivalents and short-term investments.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998, we had no significant capital spending or
purchase commitments. As of September 30, 1998, we had cash and cash
equivalents totaling $2,702,000 and working capital of $3,223,000. We believe
we have sufficient capital resources to fund our ECM customer care operations
into 2000. For the nine months ended September 30, 1998, we used $1,029,000
of cash in our operating activities, compared to $5,696,000 of cash used in
operations for the nine months ended September 30, 1997. The amount of cash
used in operating activities decreased primarily due to cost reduction
measures implemented in 1997. During the nine months ended
12
September 30, 1998, $338,000 of cash was provided from investing activities,
including $4,577,000 from the maturity of investments, net of $2,327,000 used
for purchases of investments and offset by $1,888,000 of cash utilized, net
of cash acquired in the QuickSilver purchase. No payments will be due on the
notes issued in the QuickSilver Acquisition until December 31, 1999. During
the nine months ended September 30, 1998, $290,000 was provided from
financing activities. During October 1998, we obtained $2,000,000 in cash
from the issuance of 1,000,000 shares of convertible preferred stock.
YEAR 2000
Many computers and computer programs are designed with dates that
contain two digits instead of four digits, potentially causing "19XX" to be
the date for any year entered or processed. As a result, a date-sensitive
program with a year ending in "00" may be read by the computer as "1900"
instead of "2000." This may cause the computer or program to be unable to
process date information between the twentieth and twenty-first centuries.
This inability could cause the disruption or failure of processing by such
computer or program (the "Year 2000 Issue"). The Year 2000 Issue could affect
Zamba in numerous ways, including temporarily preventing us from sending
invoices to our clients, interfering with or damaging development work we do
for our clients, and causing our clients to lower their budgets for our
customer care solutions in order to fund resolution of their own Year 2000
issues.
We have conducted a limited review of our internal computer systems
and legacy proprietary hardware and software products that could be affected
by the Year 2000 Issue. Based on this limited review, technology changes for
potential Year 2000 issues are not currently expected to have a material
impact on our operations. We expect to complete our review of our internal
systems and legacy products by the first quarter of 1999. Because of
infrastructure improvements we are making, which include servers and
networking products that are Year 2000 compliant, we currently do not
anticipate significant risk to our internal operations because of the Year
2000 Issue. During the first quarter of 1999, we will also institute a
program to contact material vendors and customers to determine the impact of
Year 2000 issues on their products and businesses, respectively. However, if
our present and future efforts to address the Year 2000 issue are not
successful, or if vendors and other third parties with which we conduct
business do not successfully address the Year 2000 issue, our business,
financial condition and results of operations may be materially adversely
affected.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISION OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The foregoing Management's Discussion and Analysis of Financial
Condition and Results of Operations contains various "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Forward-looking statements represent the Company's expectations or
beliefs concerning future events, including the following: any statements
regarding future sales and profit percentages, any statements regarding the
continuation of historical trends, and any statements regarding the
sufficiency of our cash balances and cash generated from operating and
financing activities for our future
13
liquidity and capital resource needs. We caution that any forward-looking
statements we made in this Form 10-Q or in any other announcements are
further qualified by important factors that could cause actual results to
differ materially from the forward-looking statements, including, without
limitation, our ability to obtain large-scale consulting services contracts,
the billing and utilization rates of our personnel, our ability to derive
support service revenues from our consulting services, competition and
pricing pressures, our ability to hire and retain qualified personnel, the
costs required to promote and market our services in competition with other
companies that have greater financial resources and more established
reputations, our ability to successfully integrate acquired companies, and
other factors identified in this Form 10-Q and the Company's other filings
with the Securities and Exchange Commission.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) None
(b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ZAMBA CORPORATION
By: /s/ Paul Edelhertz
--------------
Paul Edelhertz
President and Chief Executive Officer
By: /s/ Michael H. Carrel
-----------------
Michael H. Carrel
Chief Financial Officer
Dated: November 16, 1998
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