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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
| (Mark One) | ||
| /x/ |
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Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
| For the fiscal year ended December 31, 1999 |
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| / / |
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
| For the transition period from to . |
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Commission File Number 0-22718
ZAMBA CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
| Delaware (State or Other Jurisdiction of Incorporation or Organization) |
41-1636021 (I.R.S. Employer Identification No.) |
7301 Ohms Lane, Suite 200, Minneapolis, Minnesota 55439
(Address of Principal Executive Offices, including Zip Code)
Registrant's Telephone Number, Including Area Code: (612) 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/ NO / /
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'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.
The aggregate market value of voting stock held by non-affiliates of the registrant was approximately $378,675,005 based on the closing sale price of the Company's Common Stock as reported on the Nasdaq National Market on February 22, 2000
The number of shares outstanding of the registrant's common stock, as of February 22, 2000: 31,273,523 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Disclaimer Regarding Forward-Looking Information
Certain statements in this report are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and involve known and unknown risks, uncertainties and other factors that may cause the Company's actual results, performance or achievements to be materially different from the results, performance or achievements expressed or implied by the forward looking statements. Factors that impact such forward looking statements include, among others, the growth rate of the customer care marketplace, the ability of our partners to maintain competitive products, our ability to develop skills in implementing customer care packages from additional partners, the impact of competition and pricing pressures from actual and potential competition with greater financial resources, our ability to obtain large-scale consulting services agreements, changes in expectations regarding the information technology industry, our ability to hire and retain competent employees, possible changes in collections of accounts receivable, changes in general economic conditions and interest rates, and other factors identified in the Company's filings with the Securities and Exchange Commission.
Item 1. Business
Our Company
We provide businesses with consulting and systems integration services to deliver integrated "Customer Care" solutions to their customers. Our solutions help businesses attract and retain customers by improving their interactions with customers during sales, marketing, customer service, and other business functions. We deliver Customer Care solutions in customer care strategy, customer intelligence, e-business, front-office applications, contact centers, wireless and mobile technology, branding, performance improvement and support services. To us, "Customer Care" means ensuring that customers have positive, consistent experiences each time they come in contact with our clients' businesses by using smart, customer-centric strategies leveraged by the appropriate combination of technologies and techniques.
Our strategic intent is to strive for leadership in the rapidly growing Customer Care market through speed in anticipating and responding to evolving client needs, with the highest quality services available, as well as openness to new ideas and solutions. Our internal resources include business and technological experience, expertise, market position and continuous building of competencies.
Our Market Opportunity
The convergence of E-commerce and Customer Relationship Management (CRM) is driving the growth of the Customer Care solutions market
IDC has estimated that the market for Internet professional services will be $78.6 billion by 2003. These numbers indicate that the Internet is becoming the preferred means of business-to-business and business-to-customer commerce. The growing number of on-line users and e-commerce applications continue to drive usage growth, merging e-commerce and CRM, the two dominant trends in Customer Care.
Market growth in the Customer Care industry is being driven by services and technology innovation combined with the increased penetration of Internet, wireless and mobile technology and front-office applications. The market for Customer Care professional services is also being driven by the fast speed of technology improvement, which shortens solution lifecycles.
Segmentation becoming increasingly important
Customer Care is an integral function of business. It deals with one of the most fundamental business needs—caring for customers. At the same time, with the segmentation of various markets
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and industries, companies are demanding solutions that suit their different customer demographics and psychographics. These two factors have contributed to fast growth in the Customer Care solutions market.
The rapid shift to customization and one-to-one relationships with customers has required a new approach to developing and deploying Customer Care solutions. Understanding segmentation is a prerequisite for success.
Today, nearly every company is a potential Customer Care solutions client. The needs and objectives of companies vary widely. As the market has become increasingly segmented, the ability to master various markets, such as Customer Care, has become crucially important.
In a segmented business market with high competition, critical success factors include a comprehensive service portfolio, a strong and appealing brand image and an ability to respond to specific client/ customer demands rapidly. We will continue to focus in these critical areas with the aim of sustained leadership and continuous brand improvement.
Offering companies cost-effective, scalable solutions
Clients are demanding complete multi-channel, blended media solutions that help them bring the various points of customer interactions together to eliminate dysfunctional technology "silos." Conventional call center and field interactions with customers are shifting to the Web. We offer our clients rapid, dependable and scalable e-commerce solutions.
Shift from company-centric to customer-centric enterprise model
As companies recognize the need for improved customer care in the increasingly competitive new economy, the enterprise model is shifting away from the old, company-centric model to a new, customer-centric model.
The emergence of the Internet prompted a fundamental shift from back-office applications to front-office applications. Just as technology has revolutionized the way companies operate internally (back-office) it is now being utilized to revolutionize customer-facing (front-office) operations.
Historically, companies have organized their business processes to ensure efficient Enterprise Resource Planning. With this model, front-office functions that interact with the customer are disconnected. Because such a company is not operating with a unified, single face to the customer, an unsatisfactory customer experience may result. Our Customer Care services help companies put their customers at the center of their business processes. The focus of our business model is on achieving long-term customer retention rather than short-term operational efficiencies.
E-business is shaping both content and technologies
The acquisition of Camworks, an e-business solutions provider, in late 1999 allowed us to approach clients with new service offerings. With the addition, we enhanced our ability to offer Web-based applications to clients. Based in St. Paul, Camworks specialized in robust, e-commerce solutions. In combination with our existing skills, the acquisition will add to our abilities to design and deploy e-business solutions for business, including extranets, intranets and the Internet.
Our solutions
We offer a broad portfolio of competencies for a "complete" solution approach. We believe that integration and information sharing between various technology solutions in the enterprise will play a critical role as companies strive to provide their customers with a consistently valuable experience across all points of customer contact including their Web sites, contact centers and field representatives. Our
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solution-building process is directly related to the specific needs and objectives of our clients. The typical lifecycle of our client engagements includes four primary phases: strategy, initiative planning, development/deployment and support. Our competencies include Customer Care Strategy, Customer Intelligence, E-Business, Contact Centers, Wireless and Mobile Technology, Front-Office Applications, Branding, Performance Improvement, and Support Services.
The ZAMBA Methodology
Through strategy, initiative planning, development/deployment and support, our Z-Step™ methodology is the common thread that binds all of the competencies and provides clients with a proven approach for building solutions. The ZAMBA methodology is highly iterative to enable rapid solutions with minimized risks and maximized rewards.
A common set of deliverables is provided to clients during the separate phases of the engagement lifecycle to provide clients with delivery consistency and maintain integration across all competencies. These deliverables include six primary documents for all ZAMBA engagements: Customer Care Discovery™, Customer Care Strategy™, Customer Care Blueprint™, Customer Care Implementation™, Customer Care Realization™ and Customer Care Solution™.
In the end, solutions are rapidly delivered to clients with the scalable ZAMBA Agile Architectures™ that are built to accommodate future development and upgrades.
Customer Care Strategy
Our Customer Care Strategy competency offers a range of solutions to meet the needs of a variety of customers from numerous industries. The ZAMBA Customer Care Strategy™ document provides a customer-centric guide for the solution-building process. On projects with multiple phases, the Customer Care Strategy serves as a guide for future development.
Customer Intelligence
Our Customer Intelligence services helps clients collect data about their customers, extract relevant information, and turn the information into a knowledge-based product that they can use to enhance their sales, marketing and service approaches.
E-Business
Our e-business competency offers a full range of services with an e-commerce emphasis to strategize, plan, design and develop successful e-businesses, including Internet strategy, Web design and development, branding, e-sales, e-services, on-line community (portal) building—and e-CRM. Our e-business services overlap and leverage with all of our other services.
Contact Centers
Customer interactions are designed and managed to exchange information and extract knowledge to be leveraged for sales, marketing and service efforts. In the Internet economy, the role of contact centers has increased, not diminished. Our Contact Center competency has traditionally focused on the development, deployment and management of call centers. The convergence of contact points has shifted the competency to focus on blended media solutions for successful integration and automation of all customer interactions including screen pops, voice response, computer telephony, e-mail, fax and the Web. The Contact Center competency is closely connected to all of our other competencies, and our Customer Intelligence competency in particular.
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Wireless and Mobile Technology
Our wireless and mobile technology competency helps companies provide rapid call status, electronic messaging, increase productivity, increase timeliness and quality from data from field, and reduced dependence on contact centers with wireless networks and mobile devices. Wireless networks include terrestrial Wide Area Networks ("WANs"), satellite WANs and other networks such as paging, microwave and spread spectrum. Mobile devices include laptops, palm devices and phones.
Front-office Applications
The Front-office Applications competency is at the core of our business, and will likely continue as the primary source of revenues for the company as the other competencies continue to grow. We provide our clients with front-office application strategy, initiative planning, development, deployment and support. The market for integration of front-office applications continues to grow rapidly. For every dollar spent of software, we believe that an additional $1 to $4 dollars are spent on consulting and systems integration services. The ZAMBA Z-Step™ front-office application implementation methodology is a proven, iterative approach to minimize risks and maximize returns. We work with technology from many of the industry-leading software developers.
Branding
Our Branding competency specializes in defining customers to create a customer-centric perspective to drive the solution-building process. There is a close connection between branding, customer care strategy and customer intelligence. The branding process begins with the development of a Customer First™ Creative Blueprint in association with the Customer Care Strategy™ document. The creative blueprint drives the development of requirements, functionality, design properties and ultimately the identity.
Performance Improvement
Our Performance Improvement competency specializes in training and change management. Performance improvement is a systematic approach to improve the productivity and competence within companies to achieve peak performance associated with a solution or set of solutions. This competency helps companies develop a strategy for successful organizational change, then develop solutions that will improve employee performance and interactions with customers. The process begins by defining our client's needs, and the resulting needs definition guides the development of performance improvement solutions. For training, instruction may include Web-based delivery, computer-based delivery, instructor-led classes and/or print-based self-study materials. For change management, we provide a strategic communications plan, electronic performance support system, rewards and recognition programs, employee feedback systems and more. Our Performance Improvement competency is closely associated with the support phase of the ZAMBA Z-step™ methodology.
Support Services
Our Support Services competency provides a range of services to clients. At year-end we were providing ongoing support for the customer care systems of several notable clients, including Compaq, CompuCom, Enbridge Home Services, Progressive Insurance, Alliant and General Electric. The services we provide include standard maintenance, upgrades, bug fixes, warranty support, technical support, and resolution of systems failures. Many new outsourcing models have emerged recently, such as the Application Service Provider model, and are expanding the scope of support services.
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Our Customers
We continue to work with an impressive list of leading blue chip companies. These companies hire ZAMBA Solutions for its results-oriented approach, reputation, and ability to deliver on-time, on-budget solutions. Proven experience, expertise, passion, agility and focus set ZAMBA Solutions apart.
ZAMBA has in the past, and may in the future, derive a significant portion of its revenue from a relatively small number of clients. In 1999, no customer represented more than 10% of ZAMBA's revenue.
Sample Clients:
3Com, Allina Health System, American Express, Ameritech, Avid Technology, Bay Networks, BellSouth, Best Buy, Borland, Caterpillar, Calico, Cisco, Colorado Springs Utilities, CompuCom, Compaq, Consumers First, Convergys, Decision One, Diebold, Digital, Duty Free Shops, Eaton, GE Capital, GE Medical, GE Power, General Mills, Health Risk Management, Hertz, Hitachi, Data Systems, Honeywell, Houston Industries, Hewlett Packard, IBM, Inktomi, Intermedia, Intuit, Inprise, Lodgenet, Macromedia, MCI, Mervyn's, Network Equipment Technology, Norstan, Nortel, OEC Medical, Palm Computing, Public Service Electric & Gas, Qualcomm, Rockwell, Roche Diagnostics, Silicon Graphics, Southern California Edison, Sprint PCS, Sybase, Symbol, Thermawave, Think3, United HealthCare, US Bank, US West, Vantive, Warner Brothers Music, and Xerox.
Relationships with leading technology providers
ZAMBA Solutions has a broad range of integration capabilities and relationships with leading technology providers including Allaire, Aspect Communications, Clarify, Calico, Cybercash, Edify, Genesys Telecommunications, IBM, IET—Intelligence Electronics, Microsoft, NewChannel, Net Perceptions, Oracle, Primus, Rubric, Siebel, Sun, Sybase, Vignette, and Workscape.
Our Competition
The Customer Care consulting systems integration market is highly competitive and served by numerous national, regional and local firms. The market includes participants from a variety of market segments, including systems consulting and integration firms, contract programming companies, application software firms, e-business solutions providers, advertising agencies, digital agencies, professional services groups of software companies and "Big Five" consulting firms.
Primary competitors in the Customer Care market include practices within eLoyalty, Breakaway Solutions, AnswerThink, Sapient, Scient, USWeb/CKS, agency.com and Cambridge Technology Partners. We also face competition from information services organizations within potential clients. 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 and potential future competitors have financial, technical, marketing, sales, distribution 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 have a niche expertise in specific application technologies. The competitive environment could adversely affect our business, results of operations, and financial condition.
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Our People and Culture
People are the most important ingredient in our success and we foster programs to make ZAMBA Solutions an enjoyable and rewarding place to work. As of December 31, 1999, ZAMBA Solutions had 185 full-time employees throughout North America. Of that total, 145 individuals were in the professional staff, 29 in administrative roles and 11 in business development.
Our core values are agility, passion and fun, growth, honesty, results, innovation, diversity, and teamwork. Our values set our direction and stimulate our growth. At the heart of everything we do, they guide our management team and employees, helping us stay focused: to deliver innovative, cutting-edge Customer Care solutions supported by proven expertise and experience. We share these values with our customers, partners and investors. We expect them to hold us to these values and call us on them.
Our employees are not parties to any collective bargaining agreements, and we believe that relations with our employees are good.
Proprietary Rights
ZAMBA's success is dependent upon our software deployment and consulting methodologies and other intellectual property rights. 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. ZAMBA generally enters into confidentiality agreements with employees, consultants, clients and potential clients and limits access to, and distribution of its propriety information. There can be no assurance that the steps taken by the Company in this regard will be adequate to deter misappropriation of its propriety information or that the Company will be able to detect unauthorized use and take appropriate steps to enforce its intellectual property rights.
The Company's business includes the development of custom software applications in connection with specific client engagements. Ownership of such software is generally assigned to the client. In addition, the Company also develops object-oriented software components that can be reused in software application development and certain foundation and application software products, or software "tools," most of which remain the property of the Company.
Although the Company believes that its 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 the Company in the future.
Year 2000 Update
Prior to January 2000, we evaluated our business and operational systems to ensure readiness for the year 2000. As a result, we believe that all mission critical software and hardware was assessed, and if necessary, remedied to be ready for the year 2000. All mission critical hardware and software has continued to function beyond January 1, 2000 without interruption.
As the year 2000 progresses, however, we may experience problems associated with the year 2000 that have not yet been discovered. We are continuing to monitor both our internal systems and transactions with customers and suppliers for any indications of year 2000 related problems. As of February 17, 2000, we had incurred external costs of approximately $30,000 related to Year 2000 readiness, including testing, analysis, and purchase of hardware and software upgrades. We believe this to be the overall cost of our Year 2000 readiness project; however, there can be no assurance that final costs will not exceed this level.
Item 2. Properties
The Company's headquarters consists of approximately 10,451 square feet located in a multi-story building in suburban Minneapolis, Minnesota. The facility is leased pursuant to an agreement that expires
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in August 2000. The Company also maintains offices and leases space for operations and sales functions in St. Paul, Minnesota, Cupertino and Pleasanton, California, and Boston, Massachusetts. The Company plans to expand its current facilities and to move into new facilities to meet its anticipated level of operations. For additional information concerning the Company's lease obligations, see Note 3 to the Company's consolidated financial statements included in this Annual Report on Form 10-K.
Item 3. Legal Proceedings
We are not currently involved in any litigation.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of the security holders in the fourth quarter of 1999.
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Item 5. Market For Registrant's Common Equity and Related Stockholder Matters.
The Company's Common Stock began trading on December 10, 1993, on the Nasdaq National Market under the symbol "RACO," in connection with its initial public offering. On October 5, 1998, the Company changed its corporate name to ZAMBA Corporation. As a result of this name change, the Company's Common Stock began trading on the Nasdaq National Market under the symbol "ZMBA."
A summary of the range of high and low closing prices for the Company's Common Stock for each quarterly period in the two most recent fiscal years, is presented below. These prices reflect interdealer prices and do not include retail markups, markdowns or commissions.
| |
High |
Low |
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|---|---|---|---|---|---|---|
| 1998 | ||||||
| First Quarter | $ | 4.06 | $ | 1.31 | ||
| Second Quarter | 4.06 | 2.63 | ||||
| Third Quarter | 3.19 | 1.56 | ||||
| Fourth Quarter | 3.19 | 1.50 | ||||
| 1999 | ||||||
| First Quarter | $ | 3.75 | $ | 2.00 | ||
| Second Quarter | 2.97 | 1.56 | ||||
| Third Quarter | 2.56 | 1.50 | ||||
| Fourth Quarter | 18.94 | 1.88 | ||||
The Company has never paid cash dividends on its capital stock and does not anticipate declaring or paying any cash dividends in the foreseeable future. The Company intends to retain future earnings, if any, for the development of its business.
As of February 28, 2000, the Company had approximately 4,000 stockholders of record.
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Item 6. Selected Financial Data.
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
(for the years ended December 31)
(In thousands, except per share data)
| |
1999 |
1998 |
1997 |
1996 |
1995 |
|||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Net revenues: | ||||||||||||||||
| Services | $ | 27,993 | $ | 8,992 | $ | 5,487 | $ | 5,293 | $ | 2,875 | ||||||
| Products | 283 | 366 | 876 | 1,906 | 3,298 | |||||||||||
| Total revenues | 28,276 | 9,358 | 6,363 | 7,199 | 6,173 | |||||||||||
| Cost and expenses: | ||||||||||||||||
| Project costs | 14,262 | 4,440 | 4,546 | 3,695 | 1,385 | |||||||||||
| Product costs | 199 | 47 | 1,266 | 2,027 | 3,001 | |||||||||||
| Other costs | 3,000 | 730 | 12 | — | — | |||||||||||
| Sales and marketing | 2,676 | 2,186 | 4,237 | 6,258 | 9,045 | |||||||||||
| General and administrative | 6,040 | 2,863 | 2,709 | 2,091 | 2,265 | |||||||||||
| Research and development | — | 1,069 | 3,286 | 4,215 | 4,170 | |||||||||||
| Non-cash compensation | 325 | 60 | — | — | — | |||||||||||
| Amortization of intangible assets | 3,771 | 936 | — | — | — | |||||||||||
| Loss from operations | (1,997 | ) | (2,973 | ) | (9,693 | ) | (11,087 | ) | (13,693 | ) | ||||||
| Other income (expense), net | (10 | ) | 188 | 422 | 855 | 1,335 | ||||||||||
| Net loss | (2,007 | ) | $ | (2,785 | ) | $ | (9,271 | ) | $ | (10,232 | ) | $ | (12,358 | ) | ||
| Net loss per share—basic and diluted | $ | (0.07 | ) | $ | (0.10 | ) | $ | (0.36 | ) | $ | (0.40 | ) | $ | (0.50 | ) | |
| Weighted average common shares outstanding—basic and diluted | 30,548 | 26,712 | 25,932 | 25,372 | 24,765 | |||||||||||
CONSOLIDATED BALANCE SHEET DATA
(as of December 31)
(In thousands)
| |
1999 |
1998 |
1997 |
1996 |
1995 |
||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Cash and cash equivalents and short-term investments | $ | 7,969 | $ | 3,054 | $ | 5,414 | $ | 11,972 | $ | 15,074 | |||||
| Working capital | 6,847 | 4,172 | 5,182 | 12,727 | 16,818 | ||||||||||
| Total assets | 16,164 | 14,371 | 7,533 | 16,995 | 27,172 | ||||||||||
| Total stockholders' equity | 10,350 | 11,195 | 6,323 | 15,383 | 25,389 | ||||||||||
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Overview
ZAMBA is a national customer care consulting company. According to the Gartner Group, customer care is expected to grow at a cumulative average growth rate of 54% per year through 2002. Our services are designed to assist clients in building lasting relationships with customers, increase 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. We perform our services on both a fixed-bid, fixed-timetable and time and material basis. Rapid development and significant client involvement are key aspects to our methodologies. We offer our clients end-to-end assistance with their implementations, including business case evaluation, system planning and design, software implementation, modification and development, training, installation, change management, network management, and post-implementation support. Our services include the design, implementation and integration of enterprise level applications to facilitate sales automation, call center management, marketing automation and automated field service and sales. We also own approximately 35% of the equity in NextNet, Inc., a private corporation engaged in the development of wireless data products targeted at wireless DSL. The chairman of ZAMBA, Joseph B. Costello, is also the chairman of NextNet.
We currently derive most of our revenue 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, employee utilization rates, the adequacy of provisions for losses, the accuracy of estimates of resources required to complete ongoing projects, and general economic conditions and other factors. Also, revenues from a large client may constitute a significant portion of our total revenues in any particular quarter.
Key Financial Transaction
On December 29, 1999 the Company completed a merger with Camworks, Incorporated, an e-business solutions provider based in St. Paul, Minnesota. The acquisition extends ZAMBA's position in the rapidly growing, Web-based Customer Care market. The deal was valued at approximately $15 million and was accounted for as a pooling-of-interests. All of the financial information is restated on a combined basis for all periods presented. For additional information concerning the Company's merger with Camworks, see Note 4 to the Company's consolidated financial statements included in this Annual Report on Form 10-K.
Results of Operations
Results for all periods include the historical results of Camworks acquired by ZAMBA on December 29, 1999, and the effect of the issuance of shares of ZAMBA common stock in this transaction which was accounted for by the pooling-of-interests method.
Year Ended December 31, 1999, Compared to Year Ended December 31, 1998
Net Revenues
Net revenues increased 202% to $28.3 million in 1999 compared to $9.4 million in 1998, due principally to increases in both the average size and number of client projects, the acquisition of QuickSilver in September 1998, and the growth in the combined business since the acquisition. The
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increase in service revenue is primarily due to our transition to the sale of system integration services, the QuickSilver acquisition, and increased market acceptance of our services. The decrease in product revenue is due to our transition away from selling stand-alone software products. We expect services revenues to increase throughout 2000 while product revenues should continue to decline.
Project Costs
Project costs consists 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 the Company incurs in providing its services. Project costs were $14.3 million, or 51% of net revenues, in 1999 compared to $4.4 million, or 47% of net revenues, in 1998. The increase in project costs was primarily due to an increase in project personnel from 77 at December 31, 1998 to 145 at December 31, 1999. While the Company expects to meet its hiring goals in 2000, competition for personnel with information technology skills is intense and the Company expects salaries and wages to continue to increase. The Company periodically reviews and updates its billing rates to cover the expected increase in costs.
Product Costs
Product costs consist of primarily of software resold to the Company's clients. Product costs were $199,000, or 1% of net revenues, in 1999 compared to $47,000, or 1% of net revenues, in 1998. The decrease in product costs relates primarily to Company's change in business strategy during 1998 and 1999.
Other Costs
Other costs consist of non-billable project personnel costs and other business costs, including training and recruiting costs. Other costs were $3.0 million, or 11% of net revenues, in 1999 compared to $730,000, or 8% of net revenues, in 1998. The increase in other costs relates primarily to the increase in headcount for both training and recruiting personnel.
Sales and Marketing
Sales and marketing costs consist primarily of salaries, employee benefits, travel expenses of selling and marketing personnel and promotional costs. Sales and marketing expenses were $2.7 million, or 10% of net revenues, in 1999 compared to $2.2 million, or 23% of net revenues, in 1998. The dollar increases were primarily due to investments made by the Company in a new brand identity and to higher paid sales personnel. The percentage decrease is due to our increased net revenues and our success in the marketplace. The Company anticipates the dollar amount and percentage of sales and marketing expenses to increase in 2000.
General and Administrative
General and administrative costs consist primarily of expenses associated with the Company's management, finance and administrative groups, including occupancy costs. General and administrative expenses were $6.0 million, or 21% of net revenues, in 1999 compared to $2.9 million, or 31% of net revenues, in 1998. The dollar increase was primarily due to an increase in the number of employees hired during 1999, an increase in occupancy costs related to significant expansion of the Company's office space, and increased investments in other information technology infrastructure. The percentage decrease was primarily a result of improved utilization of office space and administrative functions in comparison to the growth of net revenues. As the Company grows and expands geographically in 2000, it anticipates general and administrative expenses to increase.
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Research and Development
Research and development expenses were $0, or 0% of net revenues, in 1999 compared to $1.1 million, or 11% of net revenues, in 1998. The dollar and percentage decrease is due primarily to the decrease in research and development personnel which occurred as a result of discontinuing any product development or enhancements of the KeyWare product line in 1998, and the transfer of the NextNet technology in September of 1998 to an entity of the same name. The Company anticipates no research and development expenses in 2000.
Non-cash compensation
Non-cash compensation charges in 1999 consist mainly of expenses associated with Camworks stock granted to Camworks employees' prior to the merger under pre-existing change of control provisions within these employment agreements. These stock grants represented a one-time charge to 1999 earnings of $325,000. The Company also granted stock options to non-shareholder employees of Camworks subsequent to the Company's merger with Camworks. The options were granted with an exercise price less than fair market value as a means of incenting the employees to continue employment with Zamba. Deferred compensation related to these options is $1.1 million, which will be recognized over the four year vesting period. The amount of this charge will be approximately $69,000 per quarter for each quarter during the next four years.
Amortization of Intangibles
Intangible asset amortization expense in 1999 was $3.8 million compared to $936,000 in 1998. The increase is due to the fact that we amortized the intangible assets resulting from the September 1998 acquisition of QuickSilver for a full year in 1999. The acquisition was accounted for using the purchase method of accounting. The purchase price was allocated to tangible and identifiable intangible assets. The fair value of the identifiable intangible assets acquired was $7.7 million and was recorded in the following categories: people and experiences, client references, client lists, and intellectual property and delivery methodology. These amounts are being amortized over the economic useful lives of between two and four years.
Interest Income
Interest income was $97,000 in 1999 compared to $229,000 in 1998. The decrease is principally due to decreased cash and investment balances at the beginning of 1999. Because our cash balance increased during 1999, The Company anticipates interest income to increase in 2000.
Interest Expense
Interest expense in 1999 was $107,000 compared to $59,000 in 1998. The increase is due to interest expense related to the notes payable issued in September 1998 in connection with the acquisition of QuickSilver.
Income Taxes
The Company has incurred net operating losses since inception. Because of the uncertainty about whether the Company will have taxable earnings in the future, the Company has not reflected any benefit of such net operating loss carryforwards in the accompanying consolidated financial statements.
At December 31, 1999, the Company has approximately $69.9 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-year is limited under Internal Revenue Code Section 382 because of
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significant ownership changes. In addition, the net operating loss carryforward of QuickSilver is limited under the federal consolidated tax return rules.
Year Ended December 31, 1998, Compared to Year Ended December 31, 1997
Net Revenues
Net revenues increased 47% to $9.4 million in 1998 compared to $6.4 million in 1997, due principally to the Company's transition to the sale of services instead of selling stand-alone software products and the acquisition of QuickSilver on September 22, 1998. As a result of the shift in focus, services revenues increased to $9.0 million in 1998 from $5.5 million in 1997 and product revenues decreased to $366,000 in 1998 from $876,000 in 1997.
Project Costs
Project costs were $4.4 million, or 47% of net revenues, in 1998 compared to $4.5 million, or 71% of net revenues, in 1997. The dollar and percentage decrease resulted from the cost reduction efforts in the third quarter of 1997, which significantly reduced the number of employees and related expenses for most of 1998. Although the project costs decreased from 1997 compared to 1998 because of the 1997 cost reduction efforts, due to the acquisition of QuickSilver on September 22, 1998, project personnel headcount increased 156% to 77 at December 31, 1998, from 30 employees at December 31, 1997.
Product Costs
Product costs were $47,000, or 1% of net revenues, in 1998 compared to $1.3 million, or 20% of net revenues, in 1997. The dollar and percentage decrease resulted from the cost reduction efforts in the third quarter of 1997, which significantly reduced the number of employees and related expenses for most of 1998.
Other Costs
Other costs were $730,000, or 8% of net revenues, in 1998 compared to $12,000, or 0% of net revenues, in 1997. The increase in other costs relates primarily to the increase in headcount for both training and recruiting personnel.
Sales and Marketing
Sales and marketing expenses were $2.2 million, or 23% of net revenues, in 1998 compared to $4.2 million, or 67% of net revenues, in 1997. The dollar and percentage decrease resulted from the cost reduction efforts made by the Company in the third quarter of 1997 which significantly reduced the number of employees and related expenses for sales and marketing in 1998.
General and Administrative
General and administrative expenses were $2.9 million, or 31% of net revenues, in 1998 compared to $2.7 million, or 43% of net revenues, in 1997. The percentage decrease resulted from the cost reduction efforts made by the Company in the third quarter of 1997 that significantly reduced the number of administrative employees and related expenses for 1998 relative to the number of professional staff for the same period.
Research and Development
Research and development expenses were $1.1 million, or 11% of net revenues, in 1998 compared to $3.3 million, or 52% of net revenues, in 1997. The dollar and percentage decrease is due primarily to the decrease in research and development personnel which occurred as a result of discontinuing any product
14
development or enhancements of the KeyWare product line in 1998, and the transfer of the NextNet technology in September of 1998 to an entity of the same name.
Amortization of Intangibles
Intangible asset amortization expense in 1998 was $936,000 compared to $0 in 1997. The increase is due to the acquisition of QuickSilver on September 22, 1998. The acquisition was accounted for using the purchase method of accounting. The purchase price was allocated to tangible and identifiable intangible assets. The fair value of the identifiable intangible assets acquired was $7.70 million and was recorded in the following categories: people and experiences, client references, client lists, and intellectual property and delivery methodology. These amounts are being amortized over the economic useful lives of between two and four years.
Interest Income
Interest income was $229,000 in 1998 compared to $427,000 in 1997. The decrease is principally due to decreased cash and investment balances, which were used to fund operating activities.
Interest Expense
Interest expense in 1998 was $59,000 compared to $8,000 in 1997. The increase is due to interest expense related to the notes payable issued in September 1998 in connection with the acquisition of QuickSilver.
Liquidity and Capital Resources
The Company primarily funded its operations in 1999 from cash flow generated from operations. The Company invests predominantly in instruments that are highly liquid, investment grade and have maturities of less than one year. At December 31, 1999, the Company had approximately $8.0 million in cash and cash equivalents compared to $3.1 million at December 31, 1998.
Cash provided by operating activities was $5.0 million for the twelve months ended December 31, 1999 and resulted primarily from income before amortization, depreciation and other non-cash stock compensation charges of $2.9 million, increases in accounts payable of $701,000, accrued expenses of $1.9 million and deferred revenue of $336,000, offset by an increase in accounts receivable of $1.1 million. Cash used in operating activities was $2.3 million for the twelve months ended December 31, 1998 due primarily to a loss before amortization, depreciation and other non-cash stock compensation charges of $1.3 million, and a decrease in both accounts payable of $291,000 and accrued expense of $618,000.
Cash used in investing activities was $668,000 for the twelve months ended December 31, 1999, and resulted mainly from the purchase of property and equipment. Cash used in investing activities was $155,000 for the twelve months ended December 31, 1998 and consisted primarily of cash provided by the net sale of marketable securities offset by cash used to acquire Quicksilver and property equipment additions.
Cash provided by financing activities was $629,000 for the twelve months ended December 31, 1999 and consisted primarily of cash received from the sale of Common stock upon employees' exercising stock options, offset slightly by payments of outstanding debt. Cash provided by financing activities was $2.3 million for the twelve months ended December 31, 1998 and consisted primarily of proceeds from the sale of preferred stock to our Chairman Joe Costello.
The Company believes that its existing cash and cash equivalents at December 31, 1999, together with cash provided from operations will be sufficient to meet the Company's working capital and capital expenditure requirements for at least the next 12 months.
15
New Accounting Standards
Statement of Financial Accounting Standard No. 133 "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133), as amended, effective in 2001, establishes new standards for recognizing all derivatives as either assets or liabilities, and measuring those instruments at fair value. At the present time, the Company does not anticipate that SFAS No. 133 will have a material impact on its financial position or results of operations.
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 Annual Report and the Company's other filings with the SEC.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to certain market risks based on the outstanding debt obligations of $1.4 million at December 31, 1999. As discussed in Note 5 to the consolidated financial statements, the interest rate on the Company's long-term debt obligations range from 6% to 10.5% and the obligations mature quarterly on an installment basis commencing in December 1999 and ending in December 2003. The Company does not invest in any derivative financial instruments.
16
Item 8. Financial Statements and Supplemental Schedule.
The following Financial Statements, Supplemental Schedule and Independent Auditors' Report thereon are included herein (page numbers refer to pages in this Report):
| |
Page |
|
|---|---|---|
| Reports of Independent Auditors | 22-23 | |
| Consolidated Balance Sheets as of December 31, 1999 and 1998 | 24 | |
| Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997 | 25 | |
| Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 | 26 | |
| Consolidated Statements of Stockholders' Equity for the years ended December 31, 1999, 1998 and 1997 | 27 | |
| Notes to Consolidated Financial Statements | 28-38 | |
| Supplemental Schedule—Schedule II Valuation and Qualifying Accounts | 39 |
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
On January 25, 1999, PricewaterhouseCoopers LLP ("PwC") resigned as the Company's independent accountants, because the Company intended to enter into a business relationship with the technology consulting practice of PwC. Subsequently, the Company entered into a formal business relationship with PwC. The report of PwC on the financial statements of the Company, before restatement for the 1999 pooling-of-interests, for the year ended December 31, 1997, did not contain an adverse opinion or a disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope, or accounting principles. In connection with the audit of the Company's financial statements for the year ended December 31, 1997, and through January 25, 1999, there were no "reportable events" as that term is described in Item 304(a)(1)(v) of Regulation S-K, and there were no disagreements between the Company and PwC on any matters of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of PwC would have caused PwC to make reference to the matter in their reports on the financial statements for such years.
On February 8, 1999, the Audit Committee of the Board of Directors of the Company and subsequently on May 20, 1999, at the Annual Meeting of Stockholders, the stockholders of the Company, both approved the retention of KPMG LLP ("KPMG") to be the Company's new independent accountants. During the two fiscal years ended December 31, 1997, and December 31, 1998, and for the interim period through February 8, 1999, the Company did not seek advice from KPMG regarding (i) the application of accounting principles to a specified transaction or the type of audit opinion that might be rendered on the Company's financial statements; or (ii) any matter that was either the subject of a disagreement, as defined in paragraph (a)(1)(iv) of Item 304 of Regulation S-K or a reportable event, as described in paragraph (a)(1)(v) of Item 304 of Regulation S-K.
The resignation of PwC and retention of KPMG were reported on 8-K filings with the Securities and Exchange Commission on January 26, 1999, and February 12, 1999, respectively.
17
Item 10. Directors and Executive Officers of the Registrant.
The information concerning the Company's directors and executive officers and compliance with Section 16(a) required by this item is contained in the sections entitled "Nominees" in Proposal No. 1, "Executive Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance," appearing in the Company's Proxy Statement to be delivered to stockholders in connection with the Annual Meeting of Stockholders to be held on May 18, 2000 ("Proxy Statement"). Such information is incorporated herein by reference.
Item 11. Executive Compensation.
The information required by this item is contained in the sections entitled "Director Compensation" in Proposal No. 1, "Executive Compensation," and "Compensation Committee Interlocks and Insider Participation," appearing in the Company's Proxy Statement. Such information 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" appearing in the Company's Proxy Statement. Such information 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" appearing in the Company's Proxy Statement. Such information is incorporated herein by reference.
18
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K.
(a)(3) and (c) Exhibits
| 3.01 | Registrant's Fourth Amended and Restated Certificate of Incorporation(11) | |
| 3.02 | Certificate of Designation specifying the terms of the Series A Junior Participating Preferred Stock of the Registrant as filed with the Delaware Secretary of State on September 14, 1994(3) | |
| 3.03 | Registrant's Bylaws, as amended(3) | |
| 4.01 | Form of specimen certificate for Registrant's Common Stock(1) | |
| 4.02 | Rights Agreement dated September 12, 1994 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(3) | |
| 10.01** | Registrant's 1989 Stock Option Plan, as amended, and related documents(1) | |
| 10.02** | Registrant's 1993 Equity Incentive Plan and related documents, as amended through January 10, 1998(8) | |
| 10.03** | Registrant's 1993 Directors Stock Plan, as amended, and related documents, as amended through November 14, 1995(5) | |
| 10.04** | Registrant's 1994 Officer's Option Plan(4) | |
| 10.05 | 1997 Stock Option Plan for Key Employees, Consultants and Directors of QuickSilver Group, Inc.(12) | |
| 10.06** | Registrant's 1998 Non-Officer Stock Option Plan(9) | |
| 10.07 | Form of Indemnification Agreement entered into by the Registrant and each of its directors and executive officers(1) | |
| 10.08 | Lease Agreement by and between the Registrant and Connecticut General Life Insurance Company dated May 2, 1994, for premises at 7301 Ohms Lane, Edina, MN 55439(2) | |
| 10.09** | Letter agreement by and between Registrant and Paul Edelhertz dated September 25, 1997(7) | |
| 10.10 | Sublease Agreement dated November 18, 1997, by and between Registrant and ATIO Corporation USA, Inc. for premises at 7301 Ohms Lane, Edina, MN 55439(8) | |
| 10.11** | Change in Control Employment and Severance Agreement dated March 10, 1998, by and between Registrant and Michael A. Fabiaschi(8) | |
| 10.12** | Change in Control Employment and Severance Agreement dated March 10, 1998, by and between Registrant and Steve Swantek(8) | |
| 10.13** | Change in Control Employment and Severance Agreement dated March 10, 1998, by and between Registrant and Paul Edelhertz(8) | |
| 10.14 | Series A Preferred Stock Purchase Agreement dated October 22, 1998, between the Registrant and Joseph Costello(11) | |
| 10.15 | Lease Agreement dated October 20, 1995, by and between the Registrant and All Phase Telecommunication, Inc. for premises at 10061 Bubb Road, Cupertino, California 95014(11) | |
| 10.16 | 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(11) |
19
| 10.17 | 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(11) | |
| 10.18 | Asset Purchase Agreement dated October 23, 1995 between the Registrant and Business Partner Solutions, Inc.(5) | |
| 10.19 | Agreement and Plan of Merger and Reorganization dated July 6, 1998, between the Registrant, QuickSilver Acquisition Corp. and QuickSilver Group, Inc., and Addendum dated September 2, 1998, to the Agreement and Plan of Merger and Reorganization between the Registrant, QuickSilver Acquisition Corp. and QuickSilver Group, Inc.(10) | |
| 10.20 | Letter Agreement between the Registrant and Peter Marton dated March 9, 1999(13) | |
| 10.21 | Change of Control Agreement between the Registrant and Peter Marton dated July 15, 1999(14) | |
| 10.22 | Change of Control Agreement between the Registrant and Mike Carrel dated July 8, 1999(14) | |
| 10.23 | Change of Control Agreement between the Registrant and Ian Nemerov dated July 8, 1999(14) | |
| 10.24 | Agreement and Plan of Merger and Reorganization dated December 28, 1999 between the Registrant, ZCA Corp. and Camworks, Inc.(15) | |
| 10.25 | Lease dated January 4, 2000, between the Registrant and WTA Campbell Technology Park LLC(16) | |
| 10.26 | Work Letter Agreement dated January 4, 2000, between the Registrant and WTA Campbell Technology Park LLC(16) | |
| 23.01 | Consent of KPMG LLP | |
| 23.02 | Consent of PricewaterhouseCoopers LLP | |
| 27 | Financial Data Schedule |
20
Item 14(b). Reports on Form 8-K
On January 12, 2000, the Company filed a Form 8-K to report the acquisition of Camworks, Inc.
On January 21, 2000, the Company filed a Form 8-K to report the acquisition of Fusion Consulting, Inc.
21
Independent Auditors' Report
The Board of Directors and Stockholders
ZAMBA Corporation:
We have audited the consolidated financial statements of ZAMBA Corporation and subsidiaries as of and for the years ended December 31, 1999 and 1998 as listed in the accompanying index. In connection with our audit of the consolidated financial statements, we also have audited the financial statement schedule as of and for the years ended December 31, 1999 and 1998 as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audit.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our 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, 1999 and 1998 and the results of their operations and their cash flows for the years then ended, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule as of and for the years ended December 31, 1999 and 1998 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.
We previously audited and reported on the statements of operations and cash flows of Camworks, Inc. for the year ended December 31, 1997. The contribution of Camworks, Inc. to combined revenues and net loss represented 12% and 0% of the restated totals for the 1999 pooling-of-interests. Separate financial statements of ZAMBA Corporation included in the 1997 restated statements of operations and cash flows were audited and reported on separately by other auditors. We also audited the combination of the accompanying consolidated statements of operations and cash flows for the year ended December 31, 1997 after restatement for the 1999 pooling-of-interests; in our opinion, such consolidated statements have been properly combined on the basis described in Note 4.
/s/ KPMG LLP
Minneapolis,
Minnesota
January 21, 2000
22
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of ZAMBA Corporation:
We have audited the statements of operations and cash flows, and the financial statement schedule of ZAMBA Corporation, formerly known as Racotek, Inc. (the Company), for the year ended December 31, 1997, before restatement for the 1999 pooling-of-interests described in Note 4 to the financial statements included herein. These financial statements and financial statement schedule, which are not included in this Annual Report on Form 10-K, are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of ZAMBA Corporation for the year ended December 31, 1997, before restatement for the 1999 pooling-of-interests described in Note 4 to the financial statements included herein, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as whole, before restatement for the 1999 pooling-of-interests described in Note 4 to the financial statements included herein, presents fairly, in all material respects, the information required to be included therein.
| /s/ PricewaterhouseCoopers LLP |
Minneapolis,
Minnesota
January 12, 1998
23
ZAMBA CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
| |
1999 |
1998 |
|||||
|---|---|---|---|---|---|---|---|
| |
(In thousands, except share and per share data) |
||||||
| ASSETS | |||||||
| Current assets: | |||||||
| Cash and cash equivalents | $ | 7,969 | $ | 3,054 | |||
| Accounts receivable, net | 3,363 | 2,353 | |||||
| Unbilled receivables | 274 | 309 | |||||
| Prepaid expenses and other current assets | 239 | 299 | |||||
| Total current assets | 11,845 | 6,015 | |||||
| Property and equipment, net | 1,036 | 1,275 | |||||
| Restricted cash | 110 | 210 | |||||
| Identifiable intangible assets, net | 3,044 | 6,768 | |||||
| Goodwill, net | 67 | 38 | |||||
| Other assets | 62 | 65 | |||||
| Total assets | $ | 16,164 | $ | 14,371 | |||
| LIABILITIES AND STOCKHOLDERS' EQUITY |
|
||||||
| Current liabilities: | |||||||
| Current installments of long-term debt | $ | 573 | $ | 320 | |||
| Line of credit | — | 30 | |||||
| Accounts payable | 951 | 250 | |||||
| Accrued expenses | 2,711 | 816 | |||||
| Deferred revenue | 763 | 427 | |||||
| Total current liabilities | 4,998 | 1,843 | |||||
| Long-term debt, less current installments | 816 | 1,333 | |||||
| Commitments (Note 3) | |||||||
| Total liabilities | 5,814 | 3,176 | |||||
| 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, 31,029,517 and 30,014,203 issued and outstanding at December 31, 1999 and 1998, respectively | 310 | 300 | |||||
| Additional paid-in capital | 79,900 | 78,748 | |||||
| Accumulated deficit | (69,860 | ) | (67,853 | ) | |||
| Total stockholders' equity | 10,350 | 11,195 | |||||
| Total liabilities and stockholders' equity | $ | 16,164 | $ | 14,371 | |||
The accompanying notes are an integral part of the consolidated financial statements.
24
ZAMBA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1999, 1998 and 1997
| |
1999 |
1998 |
1997 |
|||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
(In thousands, except share and per share data) |
|||||||||
| Net revenues: | ||||||||||
| Services | $ | 27,993 | $ | 8,992 | $ | 5,487 | ||||
| Products | 283 | 366 | 876 | |||||||
| 28,276 | 9,358 | 6,363 | ||||||||
| Cost and expenses: | ||||||||||
| Project costs | 14,262 | 4,440 | 4,546 | |||||||
| Product costs | 199 | 47 | 1,266 | |||||||
| Other costs | 3,000 | 730 | 12 | |||||||
| Sales and marketing | 2,676 | 2,186 | 4,237 | |||||||
| General and administrative | 6,040 | 2,863 | 2,709 | |||||||
| Research and development | — | 1,069 | 3,286 | |||||||
| Non-cash compensation | 325 | 60 | — | |||||||
| Amortization of intangibles | 3,771 | 936 | — | |||||||
| Loss from operations | (1,997 | ) | (2,973 | ) | (9,693 | ) | ||||
| Other income (expense): | ||||||||||
| Interest income | 97 | 229 | 427 | |||||||
| Sublease income | 0 | 18 | 3 | |||||||
| Interest expense | (107 | ) | (59 | ) | (8 | ) | ||||
| (10 | ) | 188 | 422 | |||||||
| Net loss | $ | (2,007 | ) | $ | (2,785 | ) | $ | (9,271 | ) | |
| Net loss per share—basic and diluted | $ | (0.07 | ) | $ | (0.10 | ) | $ | (0.36 | ) | |
| Weighted average common shares outstanding | 30,547,755 | 26,712,000 | 25,931,750 | |||||||
The accompanying notes are an integral part of the consolidated financial statements.
25
ZAMBA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1999, 1998 and 1997
| |
1999 |
1998 |
1997 |
|||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
(In thousands) |
|||||||||
| Cash flows from operating activities: | ||||||||||
| Net loss | $ | (2,007 | ) | $ | (2,785 | ) | $ | (9,271 | ) | |
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||||
| Depreciation and amortization | 4,610 | 1,468 | 1,024 | |||||||
| Loss on sale of fixed assets | — | 8 | — | |||||||
| Write-down of fixed assets | — | — | 519 | |||||||
| Forgiveness of promissory note receivable | — | 150 | — | |||||||
| Write-down of inventories | — | — | 207 | |||||||
| Amortization of premiums (discounts) on investments | — | (17 | ) | 8 | ||||||
| Non-cash stock compensation | 325 | 60 | 147 | |||||||
| Changes in operating assets and liabilities: | ||||||||||
| Accounts receivable | (1,010 | ) | 8 | 918 | ||||||
| Unbilled receivables | 35 | (295 | ) | 15 | ||||||
| Inventories | — | — | 167 | |||||||
| Prepaid expenses and other current assets | 60 | 55 | 103 | |||||||
| Accounts payable | 701 | (291 | ) | (642 | ) | |||||
| Accrued expenses | 1,904 | (618 | ) | (117 | ) | |||||
| Deferred revenue | 336 | (38 | ) | 271 | ||||||
| Net cash provided by (used in) operating activities | 4,954 | (2,295 | ) | (6,651 | ) | |||||
| Cash flows from investing activities: | ||||||||||
| Purchase of investments | — | (2,327 | ) | (2,250 | ) | |||||
| Proceeds from maturity of investments | — | 4,577 | 9,000 | |||||||
| Purchase of property and equipment | (600 | ) | (329 | ) | (156 | ) | ||||
| Proceeds from sale of fixed assets | — | 91 | — | |||||||
| Acquisition, net of cash acquired | — | (2,128 | ) | — | ||||||
| Other | (68 | ) | (39 | ) | 10 | |||||
| Net cash provided by (used in) investing activities | (668 | ) | (155 | ) | 6,604 | |||||
| Cash flows from financing activities: | ||||||||||
| Proceeds from exercises of options and warrants | 729 | 178 | 243 | |||||||
| Proceeds from sale of preferred stock | — | 2,000 | — | |||||||
| Proceeds from debt | 100 | 96 | 69 | |||||||
| Payments on debt | (290 | ) | (70 | ) | (19 | ) | ||||
| Changes in restricted cash | 100 | 155 | 104 | |||||||
| Dividends | (10 | ) | (36 | ) | — | |||||
| Advance to stockholder | — | — | (150 | ) | ||||||
| Net cash provided by financing activities | 629 | 2,323 | 247 | |||||||
| Net increase (decrease) in cash and cash equivalents | 4,915 | (127 | ) | 200 | ||||||
| Cash and cash equivalents, beginning of period | 3,054 | 3,181 | 2,981 | |||||||
| Cash and cash equivalents, end of period | $ | 7,969 | $ | 3,054 | $ | 3,181 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
26
ZAMBA CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1999, 1998 and 1997
| |
Common Stock |
|
|
|
||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Shares |
$0.01 Par Value |
Additional Paid-In Capital |
Accumulated Deficit |
Promissory Note Receivable |
Total Stockholders' Equity |
||||||||||||
| |
(In thousands, except share and per share data) |
|||||||||||||||||
| Balances at December 31, 1996 | 25,740,293 | $ | 257 | $ | 70,923 | $ | (55,797 | ) | $ | — | $ | 15,383 | ||||||
| Exercise of stock options | 258,265 | 2 | 241 | — | — | 243 | ||||||||||||
| Stock options issued to consultants | — | 1 | 146 | — | — | 147 | ||||||||||||
| Dividends declared | — | — | (36 | ) | — | — | (36 | ) | ||||||||||
| Other non-cash item | — | — | 7 | — | — | 7 | ||||||||||||
| Net loss | — | — | — | (9,271 | ) | — | (9,271 | ) | ||||||||||
| Promissory note receivable | — | — | — | — | (150 | ) | (150 | ) | ||||||||||
| Balances at December 31, 1997 | 25,998,558 | 260 | 71,281 | (65,068 | ) | (150 | ) | 6,323 | ||||||||||
| 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 | — | — | — | (2,785 | ) | — | (2,785 | ) | ||||||||||
| Balances at December 31, 1998 | 30,014,203 | 300 | 78,748 | (67,853 | ) | — | 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 | — | — | — | (2,007 | ) | — | (2,007 | ) | ||||||||||
| Balances at December 31, 1999 | 31,029,517 | $ | 310 | $ | 79,900 | $ | (69,860 | ) | $ | — | $ | 10,350 | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
27
ZAMBA CORPORATION
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Business Description:
ZAMBA Corporation ("ZAMBA" or "the Company") provides comprehensive Internet and Customer Relationship Management solutions to Fortune 500 companies. ZAMBA helps its clients increase customer loyalty and sales by improving those areas within their business that impact their customers. Prior to October 1998, the Company was known as Racotek, Inc.
Basis of Reporting
The accompanying consolidated financial statements of ZAMBA include the accounts of Camworks which was acquired December 29, 1999, a transaction accounted for by the pooling-of-interests method and its wholly owned subsidiary QuickSilver which was acquired during 1998 (see Note 4). All intercompany accounts and balances have been eliminated in consolidation.
Use of Estimates:
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash Equivalents:
The Company considers 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:
Revenues from fixed bid contracts are recognized as the services are performed based on the percent-of-completion method (the ratio of hours incurred to total estimated hours to complete the contract). Revenue from 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.
Deferred revenue is comprised of amounts received or billed in advance of services to be performed. Unbilled revenue represents amounts recognized on services performed in advance of billings in accordance with the terms of the contract.
Revenue from software sold under license agreements, included in product revenue, is recognized as revenue upon shipment if there are no post-delivery obligations, and if the terms of the agreement are such that the payment of the obligation is non-cancelable and non-refundable. Generally, other product revenue is recognized upon shipment.
Research and Development Costs:
There were no software development costs capitalized during 1999, 1998, and 1997. Amortization expense of $0, $0, and $121,000 relating to capitalized costs was recognized for the years ended December 31, 1999, 1998, and 1997, respectively.
All other research and development expenditures are charged to expense as incurred.
As a result of the transfer of the NextNet technology in September 1998 (see Note 6) the Company did not incur any research and development expenses in 1999.
28
Property and Equipment:
Property and equipment are stated at cost. Significant additions or improvements extending asset lives are capitalized; normal maintenance and repair costs are expensed as incurred. Depreciation is determined using the straight-line method over the estimated useful lives of the assets which range from two to seven 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). The cost and related accumulated depreciation or amortization of assets sold or disposed of are removed from the accounts and the resulting gain or loss is included in operations.
Intangible Assets:
Intangible assets are being amortized over the economic useful lives of between two and five years.
The Company assesses the potential impairment of its intangible assets based on anticipated cash flows from operations. No impairment charges were recorded in 1999, 1998 or 1997.
Income Taxes:
The Company utilizes 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 bases of assets and liabilities using enacted tax rates in effect for the years in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the sum of the tax currently payable and the change in the deferred tax assets and liabilities during the period.
Stock-Based Compensation:
The Company has 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). The Company accounts 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 the Company's 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. Assumed conversion shares were excluded from the net loss per share computation as their effect is antidilutive. Common stock options could potentially dilute basic earnings per share in future periods if the Company generates net income.
Reclassifications:
Certain prior year amounts have been reclassified to conform to the current year presentation.
29
2. SELECTED BALANCE SHEET INFORMATION:
| |
December 31, |
||||||
|---|---|---|---|---|---|---|---|
| |
1999 |
1998 |
|||||
| |
(in thousands) |
||||||
| Accounts Receivable, Net: | |||||||
| Accounts receivable | $ | 3,639 | $ | 2,594 | |||
| Less allowance for bad debts | (276 | ) | (241 | ) | |||
| $ | 3,363 | $ | 2,353 | ||||
| Property and Equipment, Net: | |||||||
| Computer equipment | $ | 2,884 | $ | 2,565 | |||
| Furniture and equipment | 822 | 555 | |||||
| Leasehold improvements | 186 | 186 | |||||
| 3,892 | 3,306 | ||||||
| Less accumulated depreciation and amortization | (2,856 | ) | (2,031 | ) | |||
| $ | 1,036 | $ | 1,275 | ||||
| Accrued Expenses: | |||||||
| Payroll related | $ | 1,292 | $ | 140 | |||
| Vacation | 485 | 265 | |||||
| Interest payable | 94 | 22 | |||||
| Professional fees | 487 | 50 | |||||
| Subcontractor fees | 141 | 44 | |||||
| Other | 212 | 295 | |||||
| $ | 2,711 | $ | 816 | ||||
3. LEASE COMMITMENTS:
The Company maintains its corporate office in Minneapolis, Minnesota and operating offices in St. Paul, Minnesota, Cupertino and Pleasanton, California, Burlington, Massachusetts and Colorado Springs, Colorado under terms of noncancelable operating leases which expire between August 2000 and December 2005. These leases require the Company to pay a pro rata share of the lessor's operating costs. In addition to the office space leases, the Company also has noncancelable operating leases for equipment.
The corporate office lease requires ZAMBA to maintain a restricted cash balance as security for the Company's obligations under the lease. The remaining leases require the Company to provide security deposits as part of the lease agreement. Total equipment rent and rent expense, including a pro rata share of the lessor's operating costs, were $943,000, $380,000, and $805,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
30
Future minimum lease payments for office space and equipment under noncancelable operating leases are as follows:
| Year Ending December 31 |
Operating Leases |
||
|---|---|---|---|
| |
(in thousands) |
||
| 2000 | $ | 1,202 | |
| 2001 | 855 | ||
| 2002 | 602 | ||
| 2003 | 552 | ||
| 2004 and beyond | 985 | ||
4. ACQUISITIONS
Camworks, Inc.
On December 29, 1999, the Company merged with Camworks, Inc. ("Camworks"), an e-business solutions provider based in St. Paul, Minnesota. An aggregate of 1,000,000 shares of Company common stock were issued in exchange for all of the outstanding common stock of Camworks. Such shares were restricted as of December 31, 1999, pursuant to future registrations. The transaction was accounted for as a pooling-of-interests, and accordingly, the accompanying financial statements have been restated to include the financial position and the results of operations and cash flows of Camworks for all periods presented.
The results of operations of the combining companies for the last three years are as follows (in thousands):
| |
1999 |
1998 |
1997 |
|||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Net revenues: | ||||||||||
| ZAMBA | $ | 25,495 | $ | 8,121 | $ | 5,620 | ||||
| Camworks | 2,781 | 1,237 | 743 | |||||||
| $ | 28,276 | $ | 9,358 | $ | 6,363 | |||||
| |
|
1999 |
|
1998 |
|
1997 |
|
|||
| Net income (loss): | ||||||||||
| ZAMBA | $ | (1,898 | ) | $ | (2,747 | ) | $ | (9,344 | ) | |
| Camworks | (109 | ) | (38 | ) | 73 | |||||
| $ | (2,007 | ) | $ | (2,785 | ) | $ | (9,271 | ) | ||
Merger related expenses were approximately $90,000.
The QuickSilver Group, Inc.
On September 22, 1998, the Company 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. The acquisition is intended to be 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. The
31
consolidated financial statements of the Company include the results of QuickSilver since September 22, 1998. The purchase price consists of the following:
| |
(in thousands) |
||
|---|---|---|---|
| Cash Paid | $ | 2,416 | |
| Notes payable (see Note 5) | 2,162 | ||
| Equity Common Stock | 23 | ||
| Additional Paid in Capital—Common Stock | 2,929 | ||
| Additional Paid in Capital—Options Exchanged | 684 | ||
| Additional Paid in Capital—Warrants Exchanged | 579 | ||
| $ | 8,793 | ||
The fair value of net tangible assets acquired was $1.09 million. The fair value of the identifiable intangible assets acquired was $7.70 million and was recorded in the following categories: people and experiences, client references, client lists, and intellectual property and delivery methodology.
Proforma Results
The following table presents the consolidated results of operations for the Company for 1998 and 1997 on an unaudited pro forma basis as if the acquisition had taken place at the beginning of each year:
| |
Unaudited Pro Forma |
||||||
|---|---|---|---|---|---|---|---|
| |
1998 |
1997 |
|||||
| |
(in thousands) |
||||||
| Total revenue | $ | 15,148 | $ | 12,273 | |||
| Net (loss) | (7,988 | ) | (12,947 | ) | |||
| Net (loss) per share—basic and diluted | (0.28 | ) | (0.46 | ) | |||
5. NOTES PAYABLE AND LINE OF CREDIT:
As part of the acquisition of QuickSilver, the Company issued $2.16 million in promissory notes payable. 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 payments are due 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, which is computed at fair market value, is at the sole and absolute discretion of ZAMBA's Board of Directors. During 1999 and 1998, $104,000 and $1.02 million of the notes and $4,000 and $19,000 of accrued interest payable related to such notes were converted to common stock, respectively.
As part of the acquisitions of QuickSilver and Camworks, the Company also acquired debt related to loan obligations. Loan payments are made monthly and consist of principal and interest which is computed at a rates ranging between 6.00% and 10.50%. Of these obligations, $93,000 are payable in 2000 and $60,000 are payable in 2001, $36,000 are payable in 2002 and $6,000 are payable in 2003.
The Company also acquired debt related to third party obligations. Payments on these obligations are made monthly and consist of principal and interest. Interest on these obligations range from 9.59% to 20.21%. Of these third party obligations, $6,000 are payable in 2000.
In September of 1998, the Company purchased software for $300,000. Of this obligation, $150,000 is payable in September of 2000.
32
Aggregate annual maturities of notes payable, subsequent to December 31, 1999, are as follows:
| Year Ending December 31 |
Payments on Notes |
||
|---|---|---|---|
| |
(in thousands) |
||
| 2000 | $ | 573 | |
| 2001 | 320 | ||
| 2002 | 296 | ||
| 2003 | 200 | ||
Cash paid for interest charges were $32,000, $37,000 and $8,000 in 1999, 1998 and 1997, respectively.
As of December 31, 1999, the Company also had an available line of credit of $100,000 of which $0 was outstanding at year end.
6. NEXTNET:
On September 21, 1998, the Company transferred its patented "NextNet" wireless data technology to an entity of the same name, in conjunction with the receipt by that entity of $8.0 million in private investment capital to fund the further development of the technology. The Company received forty-four percent (44%) ownership of the new company in exchange for the technology. The Company's investment in NextNet, the new company, is carried at $0, the historical carrying basis of the technology transferred, as amounts incurred by the Company up to the date of the transfer were charged to research and development expense. The Company does not have any obligations to provide funding for this investment. As of December 31, 1999, the Company's ownership in NextNet was approximately 35%.
7. STOCKHOLDERS' EQUITY:
The Company's stock incentive and non-qualified option plans provide for grants of stock options and stock awards. The number of common shares available for grant pursuant to the plans were 1,763,406, 3,107,226, and 621,753 as of December 31, 1999, 1998 and 1997, 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.
33
The following table details option activity:
| |
Options |
Price Per Option |
Weighted Average Exercise Price |
||||
|---|---|---|---|---|---|---|---|
| Balances, December 31, 1996 | 2,911,672 | 0.10-12.625 | 3.04 | ||||
| Granted | 2,078,572 | 1.50-4.3125 | 2.37 | ||||
| Exercised | (255,265 | ) | 0.20-3.88 | 1.16 | |||
| Canceled | (1,284,714 | ) | 0.10-12.625 | 5.06 | |||
| Balances, December 31, 1997 | 3,450,265 | 0.20-12.625 | 2.69 | ||||
| Granted | 6,061,492 | 1.50-4.325 | 1.93 | ||||
| Exercised | (143,330 | ) | 0.20-3.25 | 1.38 | |||
| Canceled | (3,090,228 | ) | 1.50-7.25 | 2.75 | |||
| Balances, December 31, 1998 | 6,278,199 | $ 0.20-12.625 | 1.83 | ||||
| Granted | 3,283,950 | 1.563-11.297 | 3.06 | ||||
| Exercised | (497,520 | ) | 0.29-3.75 | 1.47 | |||
| Canceled | (1,283,484 | ) | 0.42-5.00 | 1.87 | |||
| Balances, December 31, 1999 | 7,781,145 | $ 0.20-12.625 | 2.44 | ||||
| Options exercisable at December 31, 1999 | 2,851,249 | $ 0.20-12.625 | $ | 2.06 | |||
On October 13, 1998, the Company repriced outstanding stock options held by an officer to the market value of the Company's stock as of October 13, 1998. In connection with the repricing of outstanding stock options, all repriced options started vesting on October 13, 1998, and become exercisable over periods of up to four years from October 13, 1998. A total of 500,000 options, with an original exercise price of $3.25, were repriced to $1.75.
On January 20, 1998, the Company repriced outstanding stock options held by officers to the market value of the Company's stock as of January 20, 1998. In connection with the repricing of outstanding stock options, all repriced options started vesting on January 20, 1998, and become exercisable over periods of up to four years from January 20, 1998. A combined total of 400,000 options, with original exercise prices ranging from $3.00 to $3.9375, were repriced to $2.00
On October 20, 1997, the Company repriced outstanding stock options held by employees to the market value of the Company's stock as of October 20, 1997. In connection with the repricing of outstanding stock options, all repriced options started vesting on October 20, 1997, and become exercisable over periods of up to four years from October 20, 1997. Approximately 293,000 options, with original exercise prices ranging from $2.25 to $12.625, were repriced to $1.50.
No compensation cost has been recognized for stock options granted to employees or directors under the 1989 Stock Option Plan, the 1993 Equity Incentive Plan, 1993 Directors Option Plan, the 1998 Non-Officers Plan, the 1997 Stock Option Plan or the 1999 Non-Officers Plan for Key Employees, Consultants and Directors of QuickSilver Group, Inc. (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 1999, 1998
34
and 1997, the Company's net loss and net loss per share would have increased to the pro forma amounts indicated below:
| |
1999 |
1998 |
1997 |
|||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
(In thousands, except per share amounts) |
|||||||||
| Net loss | ||||||||||
| As reported | $ | (2,007 | ) | $ | (2,785 | ) | $ | (9,271 | ) | |
| Pro forma | (4,545 | ) | (5,020 | ) | (10,435 | ) | ||||
| Net loss per share— | ||||||||||
| As reported | (.07 | ) | (.10 | ) | (.36 | ) | ||||
| Basic and diluted | ||||||||||
| Pro forma | (.15 | ) | (.20 | ) | (.40 | ) | ||||
The pro forma effect on the net loss for 1999, 1998 and 1997 is not fully representative of the pro forma affect on net earnings (loss) in future years because these years do not take into consideration pro forma compensation expense related to grants made prior to 1995. In relation to the option repricing described previously, the above proforma compensation expense includes $120,000 and $37,000, for 1998 and 1997, respectively.
The aggregate fair value of options granted during 1999, 1998 and 1997, respectively, was $3.35 million, $3.53 million, and $881,000 for the 1993 Equity Incentive Plan, $163,000 $47,000, and $193,000 for the 1993 Directors Option Plan, $3.10 million, $687,000 and $0 for the 1998 Non-Officer Option Plan, $0, $351,000 and $0 for the 1997 Stock Option Plan for Key Employees, Consultants and Directors of QuickSilver Group, Inc. and $2.58 million, $0 and $0 for the 1999 Non-Officer Plan. The aggregate fair value was calculated by using the fair value of each option grant on the date of grant, utilizing the Black-Scholes option-pricing model and the following key assumptions for the Plans:
| Assumptions |
1999 |
1998 |
1997 |
|||
|---|---|---|---|---|---|---|
| Risk-free interest rates | 4.59%-6.30% | 4.18%-5.71% | 5.27%-6.77% | |||
| Volatility | 112% | 79% | 36% | |||
| Expected lives (months) | 60 | 60 | 60 |
The following table summarizes information about fixed-price stock options outstanding at December 31, 1999:
| |
Options Outstanding |
Options Exercisable |
||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Range of Exercise Prices |
Number Outstanding at December 31, 1999 |
Weighted-Average Remaining Contractual Life |
Weighted-Average Exercise Price |
Number Exercisable at December 31, 1999 |
Weighted-Average Exercise Price |
|||||||
| $0.20-.84 | 529,728 | 4.94 | $ | 0.41 | 477,836 | $ | 0.37 | |||||
| 1.50-2.38 | 5,352,647 | 8.42 | 1.86 | 1,643,393 | 1.77 | |||||||
| 2.44-3.88 | 1,099,386 | 7.95 | 2.95 | 416,048 | 3.03 | |||||||
| 4.12-5.50 | 396,284 | 7.02 | 4.76 | 304,972 | 4.76 | |||||||
| 6.00-12.63 | 403,100 | 9.83 | 9.16 | 9,000 | 9.90 | |||||||
35
Stock-Based Compensation:
Non-cash compensation charges 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. The Company also granted 161,700 stock options to non-shareholder employees of Camworks subsequent to the Company's merger with Camworks. The options were granted with an exercise price less than fair market value as a means of incenting the employees to continue employment with Zamba. Deferred compensation related to these options is $1.1 million, and will be recognized over the four year vesting period, based upon the intrinsic value method in accordance with APB No. 25.
Preferred Stock:
The Company's certificate of incorporation authorizes issuance of up to 5.0 million preferred shares with a par value of $0.01 and allows the Company's Board of Directors, without obtaining the stockholders' approval, to issue preferred stock. In October 1998, 1.0 million shares of preferred stock were purchased by the chairman of the Board of Directors of the Company for $2.00 per share. These shares converted by their terms to common stock on December 29, 1998. There were no preferred shares issued or outstanding as of December 31, 1999 or 1998.
Warrants:
In connection with the acquisition of QuickSilver stock warrants to purchase QuickSilver common stock were converted to 462,247 warrants to purchase ZAMBA common stock. These warrants were exercised during 1999. No other warrants rights are outstanding.
Stockholder Rights Plan:
On September 7, 1994, the Board of Directors adopted a Stockholder Rights Plan. Under this plan, the Board of Directors declared a dividend of one preferred share purchase right (a "Right") for each share of common stock outstanding as of September 28, 1994 (the "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 the Company extends the expiration date, redeems the Rights or exchanges the Rights for common stock.
The Rights are initially attached to the Company's Common Stock and will not trade separately. If a person or a group acquires 20 percent or more of the Company's common stock (an "Acquiring Person") or announces an intention to make a tender offer for 20 percent or more of the Company's common stock, then the Rights will be distributed (the "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.
Upon a person or group becoming an Acquiring Person, holders of the Rights (other than the Acquiring Person) will have the right to acquire shares of the Company's common stock at a substantially discounted price in lieu of the preferred stock. Additionally, if, after the Distribution Date, the Company merges into or engages in certain other business combination transactions with an Acquiring Person or 50 percent or more of its assets are sold in a transaction with an Acquiring Person, the holders of Rights (other than the Acquiring Person) will have the right to receive shares of common stock of the acquiring corporation at a substantially discounted price.
36
After a person or a group has become an Acquiring Person, the Company's 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 the Company's common stock per Right. The board also has the right to redeem outstanding Rights at any time prior to the Distribution Date (or later in certain circumstances) at a price of $0.005 per Right. The terms of the Rights, including the period to redeem the Rights, may be amended by the Company's Board of Directors in certain circumstances.
8. INCOME TAXES:
The Company has incurred net operating losses since inception. Because of the uncertainty about whether the Company will have taxable earnings in the future, the Company has not reflected any benefit of such net operating loss carryforwards in the accompanying consolidated financial statements.
At December 31, 1999, the Company has approximately $69.9 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-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.
The provision for income taxes differs from the expected tax benefit, computed by applying the federal corporate tax rate, as follow:
| |
1999 |
1998 |
|||||
|---|---|---|---|---|---|---|---|
| Expected federal benefit | $ | (683,000 | ) | $ | (934,000 | ) | |
| Change in valuation allowance | (752,000 | ) | 1,649,000 | ||||
| State taxes, net | 764,000 | (165,000 | ) | ||||
| Subsidiary net operating loss acquired | — | (860,000 | ) | ||||
| Amortization | 1,276,000 | 375,000 | |||||
| Stock compensation | (563,000 | ) | — | ||||
| Other | (42,000 | ) | (65,000 | ) | |||
| Total benefit | $ | — | $ | — | |||
Valuation allowances have been established for the entire tax benefit associated with the carryforwards and net future deductible temporary differences as of December 31, 1999, 1998 and 1997.
The tax effect of items that comprise a significant portion of deferred tax assets is:
| |
1999 |
1998 |
|||||
|---|---|---|---|---|---|---|---|
| Deferred tax assets: | |||||||
| Net operating loss carryforwards | $ | 27,354,000 | $ | 28,328,000 | |||
| Tax credits | 720,000 | 670,000 | |||||
| Other, principally depreciation and amortization | 676,000 | 504,000 | |||||
| Valuation allowance | (28,750,000 | ) | (29,502,000 | ) | |||
| Net deferred tax asset | $ | — | $ | — | |||
Due to the uncertainty surrounding the timing of realizing the benefits of its favorable tax attributes in future tax returns, the Company has placed a valuation allowance against its otherwise recognizable deferred tax assets.
37
9. EMPLOYEE SAVINGS PLAN:
The Company offers a 401(k) defined contribution benefit plan for which all regular employees are eligible. Participants may contribute up to 20% of their compensation in any plan year subject to an annual limitation. Employer contributions may be made at the discretion of the Company's Board of Directors. No Company contributions have been made to the Plan.
10. MAJOR CUSTOMER:
A portion of the Company's revenues have been derived from a significant customer for the years ended December 31, 1999, 1998 and 1997 as follows:
| |
1999 |
1998 |
1997 |
||||
|---|---|---|---|---|---|---|---|
| Customer 1 | 6 | % | 16 | % | 6 | % |
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount for cash and cash equivalents, short-term investments and long-term debt approximates fair value because of the short maturity of those instruments.
12. SUBSEQUENT EVENT:
On January 7, 2000, the Company merged with Fusion, Inc. ("Fusion"), a Colorado Springs, Colorado based consulting firm specializing in front office and contact center customer care solutions. The Company issued 80,001 shares of its common stock in exchange for all of the outstanding common stock of Fusion, and the merger was accounted for as a pooling-of-interests. Fusion had unaudited revenue of $1.0 million in 1999 and $62,000 in 1998, and unaudited net income of $138,000 in 1999 and $3,000 in 1998.
In connection with the merger agreement, the Company granted Fusion non-shareholder employees a total of 43,800 options to purchase shares of ZAMBA common stock at an exercise price below the then current fair market value. This grant will result in a charge of $87,600 and will be amortized over the four-year option vesting period. Merger related expenses were approximately $25,000.
38
ZAMBA Corporation
SCHEDULE II
Valuation and Qualifying Accounts
(In thousands)
| Column A |
Column B |
Column C |
Column D |
Column E |
||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Description |
Balance at Beginning of Period |
Additions Charged to Expense |
Deductions from Allowance |
Balance at End of Period |
||||||||
| Year ended December 31, 1999 | ||||||||||||
| Allowance for doubtful accounts (deducted from accounts receivable) | $ | 241 | $ | 133 | $ | (98 | ) | $ | 276 | |||
| Year ended December 31, 1998 | ||||||||||||
| Allowance for doubtful accounts (deducted from accounts receivable) | 238 | 13 | (10 | ) | 241 | |||||||
| Year ended December 31, 1997 | ||||||||||||
| Allowance for doubtful accounts (deducted from accounts receivable) | 354 | 118 | (234 | ) | 238 | |||||||
| Inventory obsolescence reserve (deducted from inventories) | 856 | 207 | (1,063 | ) | 0 | |||||||
39
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| ZAMBA CORPORATION | |||
| Date: March 8, 2000 |
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By |
/s/ PAUL D. EDELHERTZ Paul D. Edelhertz, President and Chief Executive Officer |
Each person whose signature appears below constitutes and appoints Paul Edelhertz 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 Report on Form 10-K, 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 |
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|---|---|---|---|---|
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| PRINCIPAL EXECUTIVE OFFICER: | ||||
| /s/ PAUL D. EDELHERTZ Paul D. Edelhertz |
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President and Chief Executive Officer |
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March 8, 2000 |
| PRINCIPAL FINANCIAL OFFICER |
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| /s/ MICHAEL H. CARREL Michael H. Carrel |
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Vice President and Chief Financial Officer |
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March 8, 2000 |
| OTHER DIRECTORS: |
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| /s/ JOSEPH B. COSTELLO Joseph B. Costello |
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Chairman of the Board |
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March 8, 2000 |
| /s/ DIXON R. DOLL Dixon R. Doll |
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Director |
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March 8, 2000 |
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| /s/ MICHAEL A. FABIASCHI Michael A. Fabiaschi |
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Director |
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March 8, 2000 |
| /s/ SVEN WEHRWEIN Sven Wehrwein |
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Director |
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March 8, 2000 |
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ANNUAL MEETING
The ZAMBA Corporation annual stockholders' meeting will be held at the Radisson Plaza Hotel, 35 South Seventh Street, Minneapolis, Minnesota, 55402, at 3:00 p.m. C.S.T. on Thursday, May 18, 2000.
SHAREHOLDER INFORMATION
ZAMBA common stock trades on the Nasdaq National Market under the symbol ZMBA. Stockholders and prospective investors are welcome to call, write or fax ZAMBA with questions or requests for additional information. Copies of ZAMBA's Annual Report on Form 10-K for the year ended December 31, 1999, may be obtained without charge by directing inquiries to:
| ZAMBA Corporation Investor Relations 7301 Ohms Lane, Suite 200 Minneapolis, MN 55439 Tel: 612-832-9800 Fax: 612-832-9383 Website: http:\\www.ZAMBAsolutions.com Transfer Agent Norwest Bank Minnesota, N.A. Stock Transfer Department 161 North Concord Exchange P.O. Box 738 South St. Paul, MN 55075-0738 Tel: 612-450-4101 Fax: 612-450-4078 Independent Auditors KPMG LLP Minneapolis, MN |
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Directors Joseph B. Costello Chairman of the Board ZAMBA Corporation Chairman and Chief Executive Officer think3 Paul D. Edelhertz President and Chief Executive Officer ZAMBA Corporation Dixon R. Doll Founder and Chairman Doll Capital Management Michael A. Fabiaschi President and Chief Executive Officer LPA Software, Inc. Sven Wehrwein Financial Consultant |
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Corporate Officers Paul D. Edelhertz President and Chief Executive Officer Michael H. Carrel Vice President and Chief Financial Officer Peter Marton Executive Vice President Chief Operating Officer Todd X. Fitzwater Senior Vice President |
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Committees of the Board |
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Audit Committee Joseph B. Costello Sven Wehrwein Compensation Committee Joseph B. Costello Dixon R. Doll |
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