<PAGE>
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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 MARCH 31, 1999
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
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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 58439
(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 MARCH 31, 1999
----- --------------
Common Stock, $0.01 par value 29,505,828
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THIS REPORT CONSISTS OF 15 SEQUENTIALLY NUMBERED PAGES.
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ZAMBA CORPORATION
INDEX
PART I -- FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE NO.
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<C> <S> <C>
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Operations for the
Three Months Ended March 31, 1999, and 1998 3
Consolidated Balance Sheets as of March 31,
1999, and December 31, 1998 4
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1999, and 1998 5
Consolidated Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Item 3. Not Applicable
PART II -- OTHER INFORMATION
Items
1-5. Not applicable 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
ZAMBA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
MARCH 31,
------------------
1999 1998
-------- --------
<S> <C> <C>
Net revenues:
Services $4,773 $1,334
Products 50 70
-------- --------
4,823 1,404
Costs and expenses:
Project costs 2,785 500
Other costs 594 163
Research and development - 384
Sales and marketing 523 478
General and administrative 1,024 451
Amortization of intangibles 936 -
-------- --------
Loss from operations (1,039) (572)
Other Income (expense):
Interest income 23 76
Interest expense (24) -
-------- --------
(1) 76
Net loss ($1,040) ($496)
-------- --------
-------- --------
Net loss per share- basic and diluted ($0.04) ($0.02)
-------- --------
-------- --------
Weighted average shares outstanding 29,061 25,001
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
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ZAMBA CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
MARCH 31, DECEMBER 31,
1999 1998
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<S> <C> <C>
Current assets:
Cash and cash equivalents $3,295 $2,962
Accounts receivable, net 3,859 2,150
Unbilled receivables 71 284
Prepaid expenses and other current assets 244 299
------------ --------------
Total current assets 7,469 5,695
Property and equipment, net 1,163 1,175
Restricted cash 200 200
Indentifiable intangible assets, net 5,838 6,768
Goodwill, net 95 38
Other assets 65 65
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Total assets $14,830 $13,941
------------ --------------
------------ --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Current installments of long-term debt $265 $285
Accounts payable 962 195
Accrued expenses 1,075 765
Deferred revenue 1,183 334
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Total current liabilities 3,485 1,579
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Long-term debt, less current liabilities 1,121 1,240
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Commitments
Total liabilities 4,606 2,819
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Stockholders' equity:
Common stock, $0.01 par value, 55,000 shares
authorized, 29,506 and 29,014 issued and
outstanding at March 31, 1999 and December 31, 1998,
respectively 295 290
Additional paid-in capital 78,804 78,667
Accumulated deficit (68,875) (67,835)
------------ --------------
Total stockholders' equity 10,224 11,122
------------ --------------
Total liabilities and stockholders' equity $14,830 $13,941
------------ --------------
------------ --------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
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ZAMBA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
(IN THOUSANDS) THREE MONTHS ENDED
MARCH 31,
--------------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($1,040) ($496)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,104 118
Provision for bad debts 25 -
Amortization of discounts on investments - 2
Changes in operating assets and liabilities:
Accounts receivable (1,734) 39
Unbilled receivables 214 -
Prepaid expenses and other current assets 52 (2)
Accounts payable 766 142
Accrued expenses 311 (171)
Deferred revenue 849 (85)
-------- --------
Net cash provided by (used in) operating activities 547 (453)
Cash flows from investing activities:
Purchase of investments - (1,927)
Proceeds from maturity of investments - 1,600
Purchase of equipment (153) (8)
Payment on debt (35) -
Other (60) -
-------- --------
Net cash used in investing activities (248) (335)
Cash flows from financing activities:
Proceeds from exercises of stock options and warrants 34 28
-------- --------
Net cash provided by financing activities 34 28
-------- --------
Net change in cash and cash equivalents 333 (760)
Cash and cash equivalents, beginning of period 2,962 3,103
-------- --------
Cash and cash equivalents, end of period $3,295 $2,343
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
5
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ZAMBA CORPORATION
NOTES TO FINANCIAL STATEMENTS
Note A. Basis of Presentation:
The unaudited consolidated financial statements of Zamba Corporation ("Zamba"
or the "Company") as of March 31, 1999, and for the three month periods ended
March 31, 1999, and 1998, reflect, in the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary to
fairly state our financial position as of March 31, 1999, and our results of
operations and cash flows for the reported period. 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 consolidated financial statements and related notes for the year
ended December 31, 1998, which were included in our 1998 Annual Report on
Form 10-K.
Note B. Net Loss per Share:
We incurred net losses for the three month periods ended March 31, 1999 and
1998, and excluded assumed conversion shares from the diluted loss per share
computation, because their effect is anti-dilutive. At March 31, 1999, we had
8,059,759 stock options outstanding, which may be dilutive in future periods.
Note C. Selected Balance Sheet Information:
<TABLE>
<CAPTION>
(in thousands) March 31, 1999 December 31, 1998
-------------- -----------------
(Unaudited)
<S> <C> <C>
Accounts receivable, net:
Accounts receivable $ 4,109 $ 2,377
Less allowance for doubtful accounts (250) (227)
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$ 3,859 $ 2,150
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-------- --------
Property and equipment, net:
Computer equipment $ 2,548 $ 2,462
Furniture and equipment 575 507
Leasehold improvements 186 186
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3,309 3,155
Less accumulated depreciation and amortization (2,146) (1,980)
-------- --------
$ 1,163 $ 1,175
-------- --------
-------- --------
</TABLE>
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Zamba is a national 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. 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.
The Company currently derives most of its revenue from systems integration
services including business case evaluation, system planning and design,
software package implementation, custom software development, training,
installation and change management. The Company also derives recurring
revenue from providing post implementation support.
The Company's revenues and earnings may fluctuate from quarter to quarter
based on the number, size and scope of projects in which the Company is
engaged, the contractual terms and degree of completion of such projects, any
delays incurred in connection with a project, employee utilization rates, the
adequacy of provisions for losses, the accuracy of estimates of resources
required to complete ongoing projects, and general economic conditions and
other factors. In addition, revenues from a large client may constitute a
significant portion of the Company's total revenue in a particular quarter.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999, COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 1998
Revenues increased 243% to $4.82 million in 1999 compared to $1.40
million in 1998. The increase in revenues is due to Zamba's acquisition of The
QuickSilver Group ("QuickSilver") in September 1998 and growth in the
combined business since the acquisition. 1999 revenues include $4.77 million
of service revenue and $50,000 of product revenue, as compared to $1.33
million of service revenue and $70,000 of product revenue in 1998. The
increase in service revenue is primarily due the Company's transition to the
sale of system integration services, the QuickSilver acquisition, and
increased market acceptance of the Company's services. The decrease in
product revenue is due to the Company's transition away from selling
stand-alone software products. The Company expects services revenues to
increase throughout 1999 while product revenues should continue to decline.
7
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Project costs consist primarily of salaries and employee benefits for
personnel dedicated to client projects and direct expenses incurred to
complete projects that were not reimbursed by the client. These costs
represent the most significant expense Zamba incurs in providing its
services. Project costs were $2.79 million or 58% of net revenues in 1999
compared to $500,000 or 36% in 1998. The increase was primarily due to the
increase in project personnel. Project personnel increased as a result of the
acquisition of QuickSilver, the Company's change in focus from software to
services, and the increased number and size of the Company's engagements. The
Company expects project personnel costs to increase on a dollar basis
throughout 1999 in order to deliver revenue growth from customer care
services.
Other costs consist of non-billable project personnel costs and other
business costs, including training and recruiting costs. Other costs were
$594,000 or 12% of net revenues in 1999 compared to $163,000 or 12% of net
revenues in 1998. The increase in other costs relates primarily to the
increase in headcount for both training and recruiting personnel which are
necessary to develop the Company's infrastructure to support the Company's
anticipated growth.
No research and development expenses were incurred in the first quarter
of 1999 compared to $384,000 in 1998. The 1998 expenses represent costs we
incurred to develop NextNet before completing the outside financing for
NextNet on September 21, 1998, as discussed in our Form 10-K for the year
ended December 31, 1998. We do not expect to incur any research and
development costs in 1999.
Sales and marketing expenses were $523,000 or 11% of net revenues in
1999 compared to $478,000 or 34% of net revenues in 1998. The increase in
dollar terms is due to the hiring of additional direct sales personnel. The
decrease in percentage terms is due to the Company's increased revenue and
its success in the marketplace. The Company expects the amount spent for
sales and marketing costs to increase slightly throughout 1999 as we grow our
staff and pay commissions for the expected increase in sales.
General and administrative expenses were $1.02 million or 21% of net
revenues in 1999 compared to $451,000 or 32% of net revenues in 1998. The
increase in dollar terms is primarily due to Zamba's acquisition of
QuickSilver and the related increase in staff headcount as well as increased
facilities and depreciation expenses. The decrease in percentage terms mostly
reflects the Company's increased revenues. The Company anticipates general
and administrative costs to increase on a dollar basis over the next several
quarters as the Company continues to expand geographically and invest in
developing a technology infrastructure to support its anticipated revenue and
headcount growth.
Intangible asset amortization expense was $936,000 in 1999 compared to
$0 in 1998. This increase is due to the acquisition of QuickSilver. The
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 $7.70 million and was
allocated to the following categories: people and experiences, client
references, client lists, and intellectual property and delivery methodology.
These amounts are being amortized over economic useful lives of between two
and four years.
8
<PAGE>
Interest income was $23,000 in 1999 compared to $76,000 in 1998. The
decrease is due to decreases in Zamba's cash and investment balances, which
were used to fund operating activities.
Interest expense was $24,000 in 1999 compared to $0 in 1998. The
increase is due to interest charges paid on debt acquired as result of the
acquisition of QuickSilver and interest charges accrued for future payments
of the notes payable issued in connection with the acquisition of QuickSilver.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999, the Company had no significant capital spending or
purchase commitments and had cash and cash equivalents totaling $3.29 million
and working capital of $3.98 million. In the first quarter of 1999, $547,000
was provided from operating activities compared to the $453,000 used in
operating activities in the same period in 1998. The increase in cash
provided from operating activities is due to a more focused effort on cash
management. During the first quarter of 1999 the company used $248,000 in
investing activities. The Company believes its existing capital resources
will be sufficient to meet its capital requirements into 2000.
YEAR 2000
Year 2000 computer issues create risks for the Company. The full extent and
scope of such risks have not yet been fully assessed. In the event that
internal products and systems, or those products and systems provided or
utilized by third parties do not correctly recognize and process date
information beyond the year 1999, material adverse effects on the Company's
business, operating results, and financial condition could result.
To address Year 2000 issues, the Company has initiated a program designed to
address the most critical Year 2000 items that would affect the Company's
products and the operations of the following functions: operations, finance,
sales and human resources. The Company has not commenced work on contingency
plans to address potential problems with its internal systems or the systems
of its supplier and customers or other third parties.
In December 1998, the Company commenced a program to inventory, assess,
remediate, and test the Year 2000 capability of the Zamba software products.
All Zamba Year 2000 activities concerning the Company's current products are
expected to be completed by October 1999.
Other Year 2000 issues primarily consist of assessing the Year 2000 impact
for outside vendors, customers, and facilities. Project plans are being
developed and will include the process of identifying and prioritizing
critical suppliers and customers at the direct interface level, and
communicating with them about their plans and progress in addressing Year
2000 issues. Detailed evaluations of the most critical third parties have
been initiated. It is expected that all Year 2000 project plans, 1999 budgets
and the remaining inventories will be completed by the end of the second
quarter of 1999. This effort will be followed by each business function
conducting a focused level of ranking and functional assessment of its
inventory to establish the methods and actions required to resolve any Year
2000 issues discovered. The assessment efforts
9
<PAGE>
are estimated to be completed by the end of the second quarter of 1999.
The remediation (modification or replacement of existing software or systems)
and the testing phases of the project plans are expected to take place
throughout most of 1999 and are estimated to be completed, for all business
critical items, by the fourth quarter of 1999. All remaining issues (which
are considered low priority or low risk to the business) are planned to be
addressed as time permits and could continue through the first half of 2000.
The Company has spent nominal amounts to date and doesn't expect the total
cost associated with required modifications to become Year 2000 ready to be
significant or to have a material adverse effect on the Company's business,
operating results and financial condition. The Company's current estimates of
the amount of time and costs necessary to implement and test its systems are
based on the facts and circumstances existing at this time. New developments
may occur that could affect the Company's estimates for the required
modifications to become Year 2000 ready. These developments include, but are
not limited to: (a) the availability and cost of personnel trained in this
area, (b) the ability to locate and correct all relevant computer code and
equipment, and (c) the planning and modifications success needed to achieve
full implementation.
Readers are cautioned that the foregoing discussion regarding Year 2000
computer issues contains forward-looking statements based on current
expectations that involve risks and uncertainties and should be considered in
conjunction with the following. The failure to correct a material Year 2000
problem could result in an interruption in, or a failure of, certain normal
business activities or operations of the Company. Such failures could
materially and adversely affect the Company's business, operating results,
and financial condition. Due in large part to the uncertainty of the Year
2000 readiness of third-party suppliers and customers, as well as the lack of a
final Year 2000 project plan for the remaining internal business systems that
are not yet assessed as Year 2000 ready, the Company is currently unable to
determine whether the consequences of Year 2000 issues will have a material
impact on the Company's business, operating results or financial condition.
The Company's programs addressing Year 2000 computer issues are expected to
reduce the Company's level of uncertainty regarding Year 2000 issues and, in
particular, about the Year 2000 readiness of its material internal
operations, suppliers, customers, and other third-parties. In addition, the
company believes that the current Year 2000 activities surrounding the
Company's software products and internal systems have reduced the risk of any
disruption caused by any Year 2000 issues in these areas.
NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standard No. 133 "Accounting for
Derivative Instruments and Hedging Activities" (SFAS No. 133), effective in
2000, establishes new standards for recognizing all derivatives as either
assets or liabilities, and measuring those instruments at fair value. The
Company has no derivative financial instruments. At the present time, the
Company does not anticipate that SFAS No. 133 will have a material impact on
the financial position or results of operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has debt at a fixed interest rate of 7%, as described in
Item 7A in the 1998 Annual Report to Shareholders on Form 10-K. There has
been no material change to this information.
10
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FACTORS THAT MAY AFFECT FUTURE RESULTS
There can be no assurance that the Company's business will grow as
anticipated or that the Company will achieve or sustain profitability on a
quarterly or annual basis in the future. The Company derives a substantial
part of its revenues from a small number of clients whom, after evaluating
the Company's capabilities, decide whether to engage the Company to create
business case evaluations, consult on change management practices and, in
some cases, to design, implement and deploy their customer care systems. A
decision by any one of these clients to delay a customer care project may
have a material adverse effect on the Company's business and results of
operations.
In order for the Company's revenues from consulting and integration services
to grow, the Company must continue to add more clients and larger projects to
plan, design and implement customer care systems. The Company's inability to
obtain clients for large-scale consulting and integration services could
materially and adversely affect the growth of its business.
In addition to the factors listed above, actual results could vary materially
from the foregoing forward-looking statements due to the Company's inability
to hire and retain qualified personnel, the risk that the Company may need to
enhance products and services beyond what is currently planned, the levels of
promotion and marketing required to promote the Company's products and
services so as to attain a competitive position in the marketplace, or other
risks and uncertainties identified in this Quarterly Report and the Company's
other filings with the SEC.
11
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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 OF FORM 8-K
(a) Exhibits
(b) Reports on Form 8-K - None
12
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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: May 17, 1999
13
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EXHIBIT INDEX
<TABLE>
<CAPTION>
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SEQUENTIALLY NUMBERED
EXHIBIT NUMBER TITLE PAGE
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<S> <C> <C>
10.01** Letter agreement by and between
Registrant and Peter Marton dated
March 9th, 1999. 15
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</TABLE>
** Management contract or compensation plan
14
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Exhibit 10.01
March 9, 1999
Peter Marton
HAND-DELIVERED
- --------------
Dear Peter,
In consideration of your service for Zamba, if your employment is
terminated other than for cause, Zamba agrees to provide you with salary
continuation for up to six (6) months at your then-prevailing salary, unless
you obtain new employment before the end of such 6-month period, at which
point the salary continuation shall cease. "Cause" means either of the
following: (i) an intentional or grossly negligent act by you causing
material harm to Zamba; or (ii) your conviction of, or plea of "guilty" or
"no contest" to, a felony.
This agreement shall not apply if your separation from employment is
voluntary. You may not assign your rights under this agreement, but Zamba may
assign this agreement to any third party without your consent, provided that
the third party agrees to be bound by its terms. This agreement shall be
binding on you and Zamba, its successors and assigns. Please sign below to
indicate your receipt and acknowledgement of this document.
Very truly yours,
/s/ Paul Edelhertz
Paul Edelhertz
President & C.E.O.
ACCEPTED THIS 9th DAY OF MARCH, 1999:
/s/ Peter Marton
Peter Marton
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 1ST QTR. 10Q
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 3,295
<SECURITIES> 0
<RECEIVABLES> 4,109
<ALLOWANCES> (250)
<INVENTORY> 0
<CURRENT-ASSETS> 7,469
<PP&E> 3,309
<DEPRECIATION> (2,146)
<TOTAL-ASSETS> 14,830
<CURRENT-LIABILITIES> 3,485
<BONDS> 0
0
0
<COMMON> 79,099
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 14,830
<SALES> 50
<TOTAL-REVENUES> 4,823
<CGS> 0
<TOTAL-COSTS> 3,379
<OTHER-EXPENSES> 2,474
<LOSS-PROVISION> 9
<INTEREST-EXPENSE> 24
<INCOME-PRETAX> (1,040)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,040)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,040)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
