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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 2002.
Commission File No.: 0-29098
NAVIDEC, INC.
(Exact name of registrant issuer as specified in its charter)
Colorado 33-0502730
-------- ----------
(State or Other (IRS Employer
Jurisdiction of Identification No.)
Incorporation or Organization)
Fiddler's Green Center
6399 S. Fiddler's Green Circle, Suite 300
Greenwood Village, Colorado 80111
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: 303-222-1000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, WITHOUT 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 in response 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 the issued and outstanding common stock held by
non-affiliates of the registrant as of March 14, 2003 was approximately
$1,171,000 based on the closing price of the registrant's common stock as
reported by the NASDAQ National Market at that date. As of March 14, 2003,
673,00 shares of the registrant's common stock were outstanding.
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes ___ No _X_
1
NAVIDEC, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
INDEX
Part I
Item 1 Business......................................................................................................... 3
Item 2 Properties....................................................................................................... 8
Item 3 Legal Proceedings................................................................................................ 8
Item 4 Submission of Matters to a Vote of Security Holders.............................................................. 8
Part II
Item 5 Market For Registrant's Common Stock and Related Stockholder Matters............................................. 9
Item 6 Selected Financial Data.......................................................................................... 9
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations............................ 10
Item 7a Quantitative and Qualitative Disclosures about Market Risk....................................................... 21
Item 8 Financial Statements and Supplementary Data...................................................................... F-1
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial
Disclosures............................................................................................................... 21
Part III
Item 10 Directors and Executive Officers of the Registrant............................................................... 22
Item 11 Executive Compensation........................................................................................... 24
Item 12 Security Ownership of Certain Beneficial Owners and Management................................................... 27
Item 13 Certain Relationships and Related Transactions................................................................... 28
Part IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................................. 30
Exhibits............................................................................................................. 3.1
2
PART I
Except as otherwise stated, the information contained in this Form 10-K is as of
December 31, 2002, the end of the registrant's last fiscal year. Information in
this Form 10-K contains forward-looking statements that involve known and
unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of the registrant to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. See "Forward-Looking Statements" in
Item 7 of this Form 10-K.
ITEM 1. BUSINESS
GENERAL
ACI Systems, Inc., the predecessor to Navidec, Inc., ("Navidec" or the
"Company") was incorporated under the laws of the State of Colorado in 1993.
Navidec provides solutions to help organizations mange secure access to web
applications within enterprise and across the business value chain. Navidec
enables organizations to deliver single sign on capabilities to their employees,
customers, suppliers and partners by providing an identity management
infrastructure for user management, access control, and single entry point to
personalized enterprise resources. Navidec provides consulting and engineering
services in Access Management, User Management, Personalization and application
Integration.
Navidec helps clients by:
- - leveraging their current corporate assets and technology investments;
- - combining and *-9consolidating diverse content, applications and services;
- - securing and personalizing their business applications and information.
The core philosophy of Navidec is to develop long-term partnerships by
dedicating teams of experienced personnel to a client's solutions to ensure
longevity of the relationship and a consistent vision for their solution. The
result is rapid deployment of efficient, cost effective e-business solutions,
which position our customers for industry leadership.
In October of 2002, Navidec formed a new wholly owned subsidiary Navidec
Capital, Inc, with the intention of acquiring companies that have positive cash
flow, strong management and growth possibilities. Navidec Capital intends to
utilize income methods of valuation to estimate the value of a specific income
stream with consideration given to the risk inherent in that stream, in
determining the price of an acquisition. The most common techniques under this
methodology are capitalization of earnings, capitalization of excess earnings
and discounted future earnings. These approaches concentrate on the income
available to Navidec Capital from acquisitions. However, Navidec Capital may
integrate other methods such as considering the market value of certain fixed
assets and the cost of some intangibles.
3
Navidec Capital intends to acquire businesses whose cash flow stream ranges from
$100,000 to $500,000 annually at the time of acquisition and whose management
has demonstrated an ability to effectively manage a profitable growing business
that has further growth potential.
Navidec Capital intends to acquire a minimum of controlling interest and
preferably 100% of potential acquisitions and to primarily focus on acquisitions
through an exchange of Navidec common stock. Additionally Navidec Capital does
not expect to acquire any business that would require the issuance of more than
20% of the then outstanding common stock of Navidec, Inc.
SALE OF NAVIDEC'S INTEREST IN DRIVEOFF.COM, INC.
On August 2, 2000, Navidec entered into an agreement related to the acquisition
of its subsidiary, DriveOff.com, Inc. ("DriveOff.com"), by CarPoint.com, LLC.
Upon completion of the transaction on September 30, 2000, Navidec became an
8.38% shareholder of CarPoint, Inc. Microsoft Corporation, Ford Motor Company
and WFC Holdings Corporation are also shareholders of CarPoint, Inc. In 2001,
Navidec sold 12,258,300 shares of CarPoint, Inc. for net proceeds of $6.9
million. In March of 2002, Navidec sold its remaining shares of CarPoint, Inc.
for net proceeds of $588,000. As of December 31, 2002 Navidec held no shares in
CarPoint, Inc.
FINANCIAL INFORMATION ABOUT SEGMENTS
Information relating to Navidec's business segments is set forth in Note 10 to
the Financial Statements, and notes thereto, beginning on page F-22.
NAVIDEC'S STRATEGY
Navidec's strategy for sustainable growth and market leadership is to continue
providing customer-driven solutions, services for businesses engaging in
web-based operations and the acquisition of other technology companies that
round out Navidec's offering and provide positive cash flows. Navidec expects to
achieve market leadership through its (i) commitment to customer demands, (ii)
expertise in best-of-breed technologies, (iii) acquisition of complementary
companies and (iv) efficient operations.
Navidec believes that the integration of a company's legacy systems with new and
existing Internet initiatives, combined with the inability of most internal
information technology departments to develop, implement and manage their
Internet environments, creates significant opportunity for e-solutions
providers. Specifically, Navidec believes that there is demand for e-solutions
providers like Navidec who have the expertise and experience to effectively
operate in a dynamic market that is technically complex and has significant
time-to-market constraints.
Navidec's goal is to become the leading provider of innovative e-business
solutions and services. To achieve this objective, Navidec is pursuing the
following strategies:
Expand Reusable Products: Navidec believes that in order to succeed it has to
expand its offering of reusable products and solutions. It is currently focusing
on products around directory and security, portal implementation and business
process integration.
4
Expand the Depth of Client Relationships: Navidec is leveraging its reputation,
industry expertise and technical skills to expand the scope of its current
customer relationships and with the goal of becoming its customers' primary
e-solutions consultant. This will enable our customers to move more rapidly
through the e-business integration process, and results in more complex
solutions with multiple related project engagements.
Continue to Develop Technical Capabilities: Navidec has significant e-solutions
capabilities that it uses to deliver comprehensive e-business solutions and
services. Navidec will continue to expand its technical capabilities and
strategic partner relationships to enable it to deliver time-critical and
mission-critical solutions and to meet the changing needs of its customers. It
will also continue to develop software applications that can be reused in order
to deliver solutions rapidly, reliably and cost-effectively.
Increase Professional Services Consulting: Expected to generate a growing
percentage of Navidec's revenues going forward, professional services consulting
relates to implementation, integration and consulting on a limited portion of a
client's e-business needs. Often done in conjunction with our partners, these
services are oriented around helping clients address specific issues. Navidec
continues to develop expertise in our partner companies' products, resulting in
them recommending us for their customers' installation and integration efforts
and to customize front and back end functionality. These short-term arrangements
can often be expanded to include building and managing Internet and e-commerce
solutions for these customers.
NAVIDEC'S SERVICES
Our Enterprise Integration Solutions include:
- - ENTERPRISE DIRECTORY - a service that cuts administration costs by aggregating
disparate user information into a single repository/data source;
- - WEB-BASED SECURITY - a service that reduces costs and operating inefficiencies
and strengthen essential business relationships by providing a secure,
personalized single point of access for all users;
- - PORTAL - a service that decreases operational expense, increases revenue and
strengthen your business relationships by aggregating information and
applications for customers, partners and employees;
OUR ENTERPRISE SERVICES INCLUDE:
- - CONSULTING - architectural review, GAP analysis, technology evaluations;
- - DEVELOPMENT - creating scalable, secure infrastructures and custom solutions;
- - INTEGRATION - business process integration with existing back-office systems;
- - CONVERSION - transforming existing products into Internet products and
services;
- - DEPLOYMENT - training and collaborative development.
5
STRATEGIC BUSINESS PARTNERSHIPS
Important in the ongoing success of Navidec is the continued development and
expansion of our strategic partner relationships. Not only do these
relationships drive sales, they ensure that Navidec remains informed of the
latest technological advances. Associating itself with the premier products
within certain platforms, Navidec ensure that it provides its clients with
leading edge solutions.
We continually evaluate and enhance our partnerships with leading product
companies such as Sun Microsystems, Inc., Novel, and Netegrity, Inc. We focus on
partnering with premier players within their market sectors. These relationships
allow us the opportunity to commit extensive training resources to maintain and
grow product competency and expertise.
Because of our strategic relationships and the large number of additional
third-party technologies that are available to us, we are not dependent upon any
single technology to provide our services. We are in a position to choose from
multiple suppliers to incorporate the most appropriate technologies and products
for each eclient solution. Because third-party providers typically license their
software directly to our customers, we are not at risk of losing individual
licenses that are necessary for our services.
In addition to our e-business development capabilities, we have significant
Internet infrastructure support expertise including light directory application
protocol, digital certificates and messaging. Our certifications and
qualifications include Sun Elite status, Sun Level 2000 Competency, Authorized
Sun-One Professional Services Subcontractor, Authorized Netscape Premier
Partner, Authorized Netscape Professional Services Subcontractor, Authorized BEA
Weblogic Service Partner, and Professional Services Subcontractor.
Navidec Capitals strategy is to acquire companies utilizing cash flow methods of
valuation to estimate the value of a specific income stream with consideration
given to the risk inherent in that stream, in determining the price of an
acquisition. The most common techniques under this methodology are
capitalization of earnings, capitalization of excess earnings and discounted
future earnings. These approaches concentrate on the income available to Navidec
Capital from acquisitions. However, Navidec Capital may integrate other methods
such as considering the market value of certain fixed assets and the cost of
some intangibles.
Navidec Capital intends to acquire businesses whose cash flow stream ranges from
$100,000 to $500,000 annually at the time of acquisition and whose management
has demonstrated an ability to effectively manage a profitable growing business,
which has further growth potential.
Navidec Capital intends to acquire a minimum of controlling interest and
preferably 100% of potential acquisitions and to primarily focus on acquisitions
through an exchange of Navidec common stock. Additionally Navidec Capital does
not expect to acquire any business that would require the issuance of more than
20% of the then outstanding common stock of Navidec, Inc.
SALES AND MARKETING
Navidec's sales efforts target clients seeking to leverage the Internet's
potential to drive sales, reduce costs or improve customer or supplier
relations. These companies are looking to supplement their current business plan
by moving up the e-business integration curve. At December 31, 2002, a direct
sales force, consisting of three (3) individuals, was primarily responsible for
identifying prospects, engaging potential users of our
6
solutions and services and maintaining and growing those client relationships.
Over the next twelve (12) months, as our development capacity grows and our
consulting and application service provider services expand, our direct sales
force is expected to expand proportionately.
Navidec participates in marketing efforts in support of the sales organization.
The goal of the marketing program is to create and sustain brand identification,
preference and loyalty and to identify and initiate sales opportunities.
Marketing is responsible for communications, advertising, public relations,
trade show participation, joint marketing with our partners and our web site
content. Marketing efforts are expected to expand proportionately with sales.
COMPETITION
The e-solutions business is a competitive environment populated by a large
number of regional and national firms providing services similar to those
provided by to Navidec. Our competition approaches the business of e-solutions
from a variety of disciplines ranging from the technical expertise of the
consulting divisions of the "Big Four" accounting firms to the image and
creative expertise of major advertising agencies. Other potential competitors
could include browser software vendors, personal computer and Unix software
vendors and Internet service providers. Additional competition results from
numerous client/server companies, database companies, multimedia companies,
document management companies, networking software companies, network management
companies and educational software companies. Some of our competitors have
longer operating histories, greater name recognition, larger customer bases or
significantly greater financial, technical and marketing resources. Competitive
factors in the e-solutions business include core technology, breadth of services
offered, creative and artistic ability, marketing and distribution resources,
customer service and support and price.
EMPLOYEES
As of December 31, 2002, we had a total of eighteen (18) employees, of which
eleven (11) were billable, three (3) were in sales and marketing, one (1) in
Navidec Capital and three (3) in management and administration. None of our
employees are represented by a labor union. Recognizing that our employees are
the key to our continued success, Navidec strives to provide each employee with
an environment for professional growth and development.
Navidec's compensation program has been structured to attract and retain highly
skilled professionals by offering competitive base salaries with
performance-based incentives. In addition, key employees may receive stock
options upon commencement of employment and additional options based upon
performance.
FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
The significant majority of Navidec's revenues are derived from customers within
the United States. All of Navidec's assets are located in the United States.
7
ITEM 2. PROPERTIES
Navidec's operations are principally located at Fiddler's Green Center, 6399
Fiddler's Green Circle, Greenwood Village, Colorado, in a 35,000 square foot
facility. All of Navidec's segments utilize this facility. The lease for this
facility expires in December 2003 and has a current monthly lease rate of
$62,000 per month through 2003.
ITEM 3. LEGAL PROCEEDINGS
In the normal course of business, Navidec is subject to, and may become a party
to, litigation regarding disputes with vendor and employment issues. Management
believes there are no other matters currently in litigation that could have a
material impact on Navidec's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 25, 2002, the shareholders of Navidec voted at the Annual Meeting of
Shareholders on three Issues:
1) To elect Navidec's Board of Directors. The directors elected at the meeting
were J. Ralph Armijo, Patrick R. Mawhinney, Gerald A. Marroney, Lloyd G. Chavez,
Jr. John R. McKowen, Louis F. Coppage and John McGrain. The vote was as follows:
For Withhold
Ralph Armijo 515,398 27,223
Patrick Mawhinney 515,582 27,039
Gerald A. Marroney 517,618 25,004
Lloyd G. Chavez, Jr 517,132 25,489
John R McKowen 516,382 26,239
Louis F. Coppage 518,308 24,313
John McGrain 518,530 24,091
2) To approve a from 1 for 10 up to a maximum of 1 for 18 reverse stock split of
the Company's issued and outstanding Common Stock, with the final decision
regarding the stock split ration being determined by the Board of Directors.
For 534,596 Against 7,855 Abstain 171
3) Authorized the Board of Directors to issue up to 4,000,000 shares: to grant
authority to the Company's Board of Directors to issued up to 4,000,000 shares
(Post-Reverse Stock-Split) of the Company's Common Stock, without further
shareholder approval to allow the Company to conclude current financings, for
the announced rights offering to current shareholders and for future financings
and acquisitions.
For 134,477 Against 124,106 Abstain 410
8
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Navidec's common stock commenced trading on the Nasdaq SmallCap Market under the
symbol "NVDC" on February 11, 1997. On October 22, 1999, it commenced trading on
the Nasdaq National Market under the symbol "NVDC." On June 5, 2002, it
commenced trading on the Nasdaq SmallCap Market under the symbol "NVDC". In
November 2002, the company instituted a 18:1 reverse stock split, the following
table sets forth, for the periods indicated, the high and low quarterly sales
price for a share (Post Stock Split) of Navidec common stock as reported on the
Nasdaq National Market and Nasdaq SmallCap Market:
Common Stock
Quarter Ended High Low
March 31, 2001 $73.128 $34.747
June 30, 2001 $48.776 $17.099
September 30, 2001 $26.098 $ 7.032
December 31, 2001 $11.159 $ 6.659
March 31, 2002 $ 9.179 $ 5.580
June 30, 2002 $ 7.379 $ 4.500
September 30, 2002 $ 5.490 $ 1.260
December 31, 2002 $ 2.600 $ 1.260
As of March 15, 2003, Navidec had 127 shareholders of record. Additionally,
based on the broker search conducted for our annual meeting and our rights
offering we estimate there are approximately 1,800 shareholder holding positions
in brokerage accounts.
Navidec has never declared a cash dividend on its common stock. Navidec
currently intends to retain funds from earnings, if any, for future growth and
therefore does not intend to pay any cash dividends in the foreseeable future on
its Common Stock. Navidec is not currently a party to any agreement restricting
the payment of dividends.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
Navidec's consolidated financial statements and related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Form 10-K.
Year Ended, December 31,
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
Statement of Operations Data
(In thousands, except per share amounts):
Revenues $ 8,555 $ 18,966 $ 33,078 $ 22,587 $ 5,120
Loss from operations (3,549) (9,048) (27,020) (18,920) (2,905)
Net income (loss) (3,933) (8,161) 16,354 (55,396) (3,195)
9
Net loss per share:
Basic $ (19.80) $ (19.44) $ 26.46 $ (85.68) $ (4.92)
Diluted $ (19.80) $ (19.44) $ 24.66 $ (85.68) $ (4.92)
Weighted average shares--
Basic 199 421 620 647 649
Diluted 199 421 664 647 649
December 31,
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
Balance Sheet Data (in thousands):
Cash & cash equivalents $ 711 $ 35,860 $ 3,475 $ 2,465 $ 130
Investment in debt securities - 9,855 2,990 - -
Restricted cash - - - 1,200 -
Working capital 293 46,264 17,328 1,841 182
Total assets 5,265 65,028 89,177 10,612 3,476
Long-term debt including
current portion 989 779 2,270 1,770 455
Convertible debt - 19,876 - - 250
Total stockholders' equity 1,799 39,095 60,567 4,967 1,855
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
We have identified the policies below as critical to our business operations and
the understanding of our results from operations. The impact and any associated
risks related to these policies on our business operations is discussed
throughout Management's Discussion and Analysis of Financial Conditions and
Results of Operations where such policies affect our reported and expected
financial results. For a detailed discussion on the application of these and
other accounting policies, see Note 2 in the Notes to the Consolidated Financial
Statements in Item eight of this Annual Report on Form 10-K, beginning on page
F-8. Note that our preparation of this Annual Report on Form 10-K requires us to
make estimates and assumptions that affect the reported amount of assets and
liabilities, disclosure of contingent assets and liabilities at the date of our
financial statements, and the reported amounts of revenue and expenses during
the reporting period. There can be no assurance that actual results will not
differ from those estimates.
- -Revenue recognition. Our revenue recognition policy is significant because our
revenue is a key component of our results of operations. In addition, our
revenue recognition determines the timing of certain expenses, such as
commissions. We follow very specific and detailed guidelines in measuring
revenue, however, certain judgments affect the application of our revenue
policy. Revenue results are difficult to predict, and any shortfall in revenue
or delay in recognizing revenue could cause our operating results to vary
significantly from quarter to quarter and could result in future operating
losses. During 2002, approximately 60% of our revenue was generated from
fixed-price, fixed completion date work. Revenue for this work is recognized on
a percentage-of-completion basis using the ratio of direct costs incurred to the
estimated total direct costs of the engagement. Estimates of the total direct
costs of the engagement require judgments about the time needed to complete the
project and the level of personnel involved. Management regularly reviews its
estimates and underlying assumptions for contracts in progress. The remaining
40% of revenue during 2002 was from time
10
and materials contracts for which revenue is recognized as the work is
completed. Revenue recognition for time and materials contracts is not
significantly impacted by judgments and estimates.
- -Reserves for Bad Debt and Revenue Contingencies. Our policy on reserves for bad
debt and revenue contingencies determines the timing and recognition of expenses
and revenue recognition.
We follow guidelines that reserve based off of historical and account specific
trends, however, certain judgments affect the application of our bad debt and
revenue reserve contingencies. Repayment is difficult to predict, and any
shortfall or delay in recognizing payment could cause operating results to vary
significantly from quarter to quarter and could result in future operating
losses. Our receivables are recorded net of an allowance for doubtful accounts
which requires management to estimate amounts due which may not be collected.
This estimate requires consideration of general economic conditions, overall
historical trends related to the Company's collection of receivables, customer
specific payment history, and customer specific factors affecting their ability
to pay amounts due. Management routinely assesses and revises its estimate of
the allowance for doubtful accounts.
OVERVIEW
Navidec provides solutions to help organizations mange secure access to web
applications within enterprise and across the business value chain. Navidec
enables organizations to deliver single sign on capabilities to their employees,
customers, suppliers and partners by providing an identity management
infrastructure for user management, access control, and single entry point to
personalized enterprise resources. Navidec provides consulting and engineering
services in Access Management, User Management, Personalization and application
Integration.
The core philosophy of Navidec is to develop long-term partnerships by
dedicating teams of experienced personnel to a client's solutions to ensure
longevity of the relationship and a consistent vision for their solution. The
result, rapid deployment of efficient, cost effective e-business solutions,
which position our customers for industry leadership.
Initially formed in July 1993 as a value-added reseller of computer products
under the name of ACI Systems, Inc., we were renamed Navidec, Inc., in July
1996, after our merger with Interactive Planet, Inc., a designer and developer
of Internet web sites. In July 1997, TouchSource, Inc., a designer and developer
of interactive kiosks was acquired. This acquisition significantly enhanced
Navidec's business model by combining expertise in traditional marketing and
distribution with Internet/Intranet technology. In December 1998, CarWizard.com
and LeaseSource.com were acquired, two prominent online automotive sites, in
order to expand Navidec's on-line automotive presence.
During 2002, Navidec generated revenues from one division eSolutions.
Approximately 60% of the eSolutions revenue was generated from fixed-price,
fixed completion date contracts. In developing these contracts, consideration is
given to the technical complexity of the engagement, the resources required to
complete the engagement and the extent to which we will be able to deploy
internally developed software tools to deliver the solution. The goal is to make
most eSolutions work deliverable within a thirty (30) to sixty (60)-day time
frame. Revenue for this work is recognized on percentage-of-completion
accounting basis using the ratio of direct costs incurred as compared to the
estimated total direct costs of the engagement. The
11
remaining 40% of revenue is from work done on a time and materials basis.
Revenue for this work is recognized as it is completed.
Navidec's product distribution business generated revenue through the resale of
third party software and hardware components, graphical printers and supplies.
Since product distribution is not related to our core strategy, we discontinued
these sales efforts in 2001. All of the assets associated with the product
distribution segment were sold or written off in 2001.
Navidec's operating expenses consist of product development, general and
administrative, sales and marketing and depreciation, amortization and
impairment of goodwill. Additional operating expenses were incurred in 2002,
such as non-cash stock expense, restructuring charges and losses on impairment
of assets. Product development includes salaries and out-of-pocket expenses
incurred in developing new technologies for our own use or for future customer
applications generally, as opposed to customer-specific development. General and
administrative consists primarily of salary and benefit expenses for our
non-billable employees. It also includes expenses associated with our office
facility and equipment leases. Sales and marketing includes personnel costs,
advertising costs, costs associated with participation in trade shows and direct
marketing program and related travel expenses. Non-cash stock expense relates to
employee stock options that were repriced in 2001, and warrants given to a third
party vendor for marketing services provided during the year. Restructuring
charges are related to expenses incurred in reducing employees to a level that
corresponded to current demands for services, and expenses related to
restructuring leases to meet the needs of the company. Loss on impairment of
assets is the cost of bringing assets in line with current market value.
RESULTS OF OPERATIONS (a)
Years ended December 31,
1999 2000 2001 2002
---- ---- ---- ----
REVENUE:
eSolutions $ 13,745 $ 31,294 $ 22,127 $ 5,120
Product distribution 1,944 1,071 460 --
-------- -------- -------- -------
Total revenue 15,689 32,365 22,587 5,120
COST OF REVENUE 10,081 17,185 13,147 2,846
-------- -------- -------- -------
Gross margin 5,608 15,180 9,440 2,274
OPERATING EXPENSES:
Product development 1,103 5,956 4,102 147
General and administrative 3,507 7,259 7,827 2,062
Sales and marketing 1,758 7,384 7,059 952
Depreciation/amortization & impairment of goodwill 806 3,268 3,016 1,947
Non cash stock expense -- -- 600 71
Restructuring charges -- -- 4,442 --
Loss on restructured receivables -- 4,016 -- --
Loss on impairments of assets -- -- 1,314 --
-------- -------- -------- -------
Total operating expenses 7,174 27,883 28,360 5,179
-------- -------- -------- -------
LOSS FROM OPERATIONS $ (1,566) $(12,703) $(18,920) $(2,905)
======== ======== ======== =======
The results of operations for the years ended 1999 and 2000 exclude the results
of DriveOff.com which was started in 1998 and sold in 2000. The results of
operations excluding DriveOff.com are not meant to supplant the results of
operations reported under generally accepted accounting principles and are
reported solely for ease of comparison between periods. Summarized below are the
results of DriveOff.com which are necessary to reconcile to the as reported GAAP
numbers.
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1999 2000
---- ----
Revenues $ 3,277 $ 713
Cost of revenue 664 101
-------- --------
Gross margin 2,613 612
Operating Expense:
Product development 1,899 312
General and administrative 1,805 8,695
Sales and marketing 6,391 5,922
-------- --------
Total operating expense 10,095 14,929
-------- --------
LOSS FROM OPERATIONS $ (7,482) $(14,317)
RESULTS OF OPERATIONS AS A PERCENTAGE OF REVENUES
Years ended December 31,
1999 2000 2001 2002
---- ---- ---- ----
REVENUE:
ESolutions 87.6% 96.7% 98.0% 100.0%
Product distribution 12.4% 3.3% 2.0% --
----- ----- ----- -----
Total revenue 100.0% 100.0% 100.0% 100.0%
COST OF REVENUE 64.3% 53.1% 58.2% 55.6%
----- ----- ----- -----
Gross margin 35.7% 46.9% 41.8% 44.4%
OPERATING EXPENSES:
Product development 7.0% 18.4% 18.2% 2.9%
General and administrative 22.4% 22.4% 34.7% 40.3%
Sales and marketing 11.2% 22.8% 31.3% 18.6%
Depreciation/amortization & impairment of goodwill 5.1% 10.1% 13.4% 38.0%
Non-cash stock expense -- -- 2.7% 1.4%
Restructuring charges -- -- 19.7% --
Loss on restructured receivables -- 12.4% -- --
Loss on impairments of assets -- -- 5.8% --
----- ----- ----- -----
Total operating expenses 45.7% 86.1% 125.8% 101.2%
LOSS FROM OPERATIONS (10.0%) (39.2%) (84.0%) (56.8%)
YEARS ENDED DECEMBER 31, 2001 AND 2002
Revenue for 2002 decreased $17.5 million, or 77.3%, from 2001 revenues of $22.6
million to $5.1 million in 2002. The decrease was primarily a result of lower
market demand for IT services, the discontinuation of sales of hardware in
solutions in 2002, and an overall downturn in the economy. Revenue in 2002
associated with eSolutions decreased $17.0 million, or 76.9%, from 2001 revenues
of $22.1 million to $5.1 million in 2002. As a result of our decision to
discontinue product distribution in 2001 our revenue for this source decreased
$460,000, or 100.0%, from $460,000 in 2001 to $0 in 2002.
Gross margin decreased $7.1 million, or 75.9%, from gross margin of $9.4 million
in 2001 to $2.3 million in 2002. As a percentage of revenue, gross profit
increased from 41.8% to 44.4%. The decrease in total dollars was a result of
decreased sales, while as a percentage we saw an increase as a result of product
mix in eSolutions.
13
Product development costs decreased $4.0 million, or 96.4%, from $4.1 million in
2001 to $147,000 in 2002. As a percentage of revenue, product development costs
decreased from 18.2% in 2001 to 2.9% in 2002. The decrease in product
development cost is the result of focusing on application security in 2002.
General and administrative expenses decreased $5.8 million or 74.3%, from
general and administrative expenses of $7.8 million in 2001 to $2.0 million in
2002 due to reductions in personnel and associated overhead expenses. As a
percentage of revenue, general and administrative expenses increased from 34.7%
in 2001 to 39.3% in 2002. . Navidec is projecting general and administrative
expenses to remain stable or decrease slightly in 2003, as a result of personnel
changes and reduced overhead expenses.
Sales and marketing expenses decreased $6.1 million, or 86.5%, from $7.1 million
in 2001 to $953,000 in 2002. As a percentage of revenue, sales and marketing
expenses decreased from 31.3% to 18.6% of revenue in 2001 and 2002,
respectively. The decreased spending was primarily due to decreased marketing
activities and the closing of remote sales offices. Navidec is projecting sales
and marketing expenses to remain stable in 2003.
During 2001, the Company cancelled approximately 1.3 million unexercised and
outstanding stock options and granted 883,000 replacement options with a strike
price of zero. Deferred compensation was recorded for the intrinsic value of the
options and compensation expense of $566,000 was recorded as non cash stock
expense as the deferred compensation was amortized. At December 31, 2002 $38,000
of deferred compensation remained, which will be amortized into non cash stock
expense in future periods. The Company has presented non cash stock expense in
the accompanying consolidated statements of operations. The allocation of non
cash stock expense to the same functional classification as the employees' cash
compensation is as follows:
2002
----
(In Thousands)
Cost of revenue $ 13
Sales and marketing 3
General and administrative 55
-----
Total non cash stock expense $ 71
=====
Depreciation and amortization decreased $1,069,000 or 35.4% from $3.0 million in
2000 to $1.9 million in 2002. Depreciation was down in part due to asset
impairments during the prior year and due to more assets becoming fully
depreciated.
Interest income decreased from $223,000 in 2001 to $32,000 in 2002. This
decrease was the result of lower cash and investment balances in 2002.
Interest expense remained stable increasing slightly from $215,000 in 2001 to
$219,000 in 2002.
During 2001 Navidec realized a loss of $44.9 million on the sale of the majority
of its holding in CarPoint, Inc and the write down of the remaining balance to
fair value. The remainder of the CarPoint stock was carried at $588,000 at
December 31, 2001 and sold in March 2002.
14
During 2002, the Company sold BEA Systems, Inc. stock with an original cost of
$29,000 for $12,000, resulting in a $17,000 loss included in other income.
The Company's deferred tax assets, including approximately $39 million in net
operating loss carryforwards are fully reserved because their realization is not
certain.
As a result of the items discussed above, we recorded a net loss of $3.2 million
in 2002 versus net loss of $55.4 million in 2001. Our basic and diluted loss per
share was $4.84 in 2002 versus a loss per share of $85.68 and earnings per share
of $26.46, respectively in 2001 and 2000.
YEARS ENDED DECEMBER 31, 2000 AND 2001
Revenue for 2001 decreased $9.8 million, or 30.2%, from 2000 adjusted revenues
of $32.4 million to $22.6 million in 2001. The decrease was primarily a result
of lower market demand for IT services, a struggling economy and the reserve of
$1.6 million for disputed contracts. Revenue in 2001 associated with eSolutions
decreased $9.2 million, or 29.3%, from 2000, down to $22.1 million from $31.3
million. Product distribution revenue decreased $611,000, or 57.0%, from $1.1
million in 2000 to $460,000 in 2001. The decrease in revenues was due to
Navidec's decision to discontinue its focus on products distribution during the
second half of the year.
Gross margin decreased $5.7 million, or 37.8%, from adjusted gross margin of
$15.2 million in 2000 to $9.4 million in 2001. As a percentage of revenue, gross
profit decreased from 46.9% to 41.8%. The decrease in the gross margin was a
result of product mix and decreasing margins in eSolutions. As a result of
pricing pressures experienced during the year, eSolutions had a gross margin of
42.5% in 2001 down from 49.4% in 2000.
Product development costs decreased $1.9 million, or 31.1%, from adjusted
expenses of $6.0 million in 2000 to $4.1 million in 2001. As a percentage of
revenue, product development costs decreased from 18.4% in 2000 to 18.2% in
2001. The decrease in product development cost is the result of narrowed focus
on the areas that Navidec is pursuing.
General and administrative expenses increased $568,000, or 7.8%, from adjusted
general and administrative expenses of $7.3 million in 2000 to $7.8 million in
2001. As a percentage of revenue, general and administrative expenses increased
from 22.4% in 2000 to 34.7% in 2001. The increased spending was primarily due to
increased overhead expenses related to projected needs for increased personnel
necessary to support planned expansion in revenues in 2001. Navidec is
projecting general and administrative expenses to decrease in 2002, as a result
of personnel changes and reduced overhead expenses.
Sales and marketing expenses decreased $325,000, or 4.4%, from $7.4 million in
2000 to $7.1 million in 2001. As a percentage of revenue, sales and marketing
expenses increased from 22.8% to 31.3% of revenue in 2000 and 2001,
respectively. The increased spending was primarily due to increased marketing
activities and the opening of remote sales offices to support expected expanding
revenue in 2000, many of which were guaranteed through 2001.
15
To align Navidec's cost structure with changing market conditions and to create
a more efficient and flexible organization, Navidec reduced its headcount by
approximately 200 employees during 2001 and recorded restructuring charges of
$4.4 million for severance, benefits, and other contract exit costs.
Impairment charges of $1.3 million included for abandoned leasehold improvements
related to efforts to reduce operating costs by renegotiating its lease to
encompass less space and a $75,000 charge to write down other assets to their
fair value.
During 2001, the Company cancelled approximately 1.3 million unexercised and
outstanding stock options and granted 883,000 replacement options with a strike
price of zero. Deferred compensation was recorded for the intrinsic value of the
options and compensation expense of $566,000 was recorded as non cash stock
expense as the deferred compensation was amortized. At December 31, 2001
$191,000 of deferred compensation remained, which will be amortized into non
cash stock expense in future periods. The Company also issued 100,000 warrants
to a vendor in Lieu of cash for advertising services, resulting in non cash
stock expense of $34,000. The Company has aggregated these costs and presented
non cash stock expense in the accompanying consolidated statements of
operations. The allocation of non cash stock expense to the same functional
classification as the employees' cash compensation is as follows:
2001
----
(In Thousands)
Cost of revenue $ 111
Sales and marketing 99
General and administrative 390
-----
Total non cash stock expense $ 600
=====
Depreciation and amortization decreased $252,000 or 7.7% from $3.3 million in
2000 to $3.0 million in 2001. Depreciation was down in part due to asset
impairments during the year and due to more assets becoming fully depreciated.
Interest income decreased from $1,153,000 in 2000 to $223,000 in 2001. This
decrease was the result of lower cash and investment balances in 2001.
Interest expense decreased from $907,000 in 2000 to $215,000 in 2001. Navidec
paid off debt at the beginning of the year. The term note with Silicon Valley
Bank was not taken out until the end of 2001.
During 2001 Navidec realized a loss of $44.9 million on the sale of the majority
of its holding in CarPoint, Inc and the write down of the remaining balance to
fair value. The remainder of the CarPoint stock was carried at $588,000 at
December 31, 2001 and sold in March 2002.
During 2001, the Company sold BEA Systems, Inc. stock with an original cost of
$673,000 for $881,000, resulting in a $208,000 gain included in other income.
Navidec's effective tax rate was 32.8% in 2000 versus a 12.5% benefit in 2001
because of our pretax income of $24.4 million in 2000 versus a pre-tax loss of
$63.8 million in 2001. The effective tax rate differs from the statutory tax
rate because of a valuation allowance of approximately $15.6 million recorded in
2001. The
16
Company's deferred tax assets, including approximately $35 million in net
operating loss carryforwards are fully reserved because their realization is not
certain.
In May 2001, we came to an agreement with an unsecured creditor to settle a note
payable with a carrying amount of $793,000 for $250,000 and monthly payments
through December 2001 of $13,333. The settlement resulted in an extraordinary
gain of $450,000.
As a result of the items discussed above, we recorded a net loss of $55.4
million in 2001 versus net income of $16.4 million in 2000. Our basic and
diluted loss per share was $85.68 in 2001 versus basic and diluted earnings per
share of $26.46 and a loss of $24.66, respectively in 2000 and 1999.
LIQUIDITY AND CAPITAL RESOURCES
From our inception through December 31, 2002, we funded our operations primarily
from the following sources:
- - equity proceeds through public offerings and private placements of our
securities;
- - revenue generated from operations;
- - loans from principal shareholders and employees;
- - loans and lines of credit; and
- - accounts receivable factoring arrangements made available by banks.
Cash, flow from operations has not historically been sufficient to sustain our
operations without the above additional sources of capital.
As of December 31, 2002, we had cash and cash equivalents of $130,000 and
working capital of $182,000. This compares with cash and cash equivalents of
$2.5 million, restricted cash of $1.2 million and working capital of $1.8
million as of December 31, 2001.
Cash used in our operating activities totaled $1.8 million for the year ended
December 31, 2002 a decrease of $10.8 million or a 92.4% when compared with
$11.0 million for the year ended December 31, 2001. The decrease in the
Company's net loss before non-cash adjustments of $10.8 million between periods
($11.7 million in 2001 to $892,000 in 2002) was the primary factor in this
decrease.
Cash provided by investing activities totaled $598,000 for the year ended
December 31, 2002 compared with cash used of $10.7 million for the year ended
December 31, 2001. The variance is the result of the Company selling the
majority of its investments in CarPoint and BEA systems in 2001 and the
remaining portions were sold in 2002.
Cash used in our investing activities during 2001 consisted primarily of
expenditures for property and equipment and investments in incubated companies,
the purchase of marketable securities and investments in notes payable. Cash
provided by our investing activities in 2001 consisted primarily of sales of
investments
17
and repayments of notes receivable which generated cash of $12.8 million. These
cash proceeds are non-recurring.
Cash used in financing activities was $1.1 million during the year ended
December 31, 2002. Cash used in financing activities was $689,000 during the
year ended December 31, 2001. Cash used in financing activities in 2002 includes
a pay down of notes and capital leases of $1.9 million, advances from the
Company's credit line of $350,000 and a new note of $135,000 and a new $250,000
convertible debenture taken out during the forth quarter of the year. Cash used
in financing activities in 2001 consisted of proceeds from a $1.0 million term
note that the Company took out during the fourth quarter of 2001 and the
repayment of $1.7 million of notes payable and capital leases.
At December 31, 2002, the Company had $233,000 outstanding under its term credit
facility. During 2002, the Company was out of compliance with its loan covenants
and as such the bank accelerated the repayment of its term and credit line
facility. The Company loan requires that it pay off the loan during the first
quarter of 2003. The Company intends to use a portion of the proceeds from its
rights offering to pay off the loan. If the Company is unable to complete a
sufficient portion of the rights offering that will enable it to pay off this
loan, the Company will attempt to renegotiate the loan, but there are no
guarantees that it will be able to find acceptable terms.
At December 31, 2001, the Company had $1 million outstanding under its term
credit facility. In April 2002 the Company amended its line of credit agreement
with the Bank, and as a result, the availability under the Line was $600,000 as
of April 3, 2002. Availability under the line of credit as amended in April
2002, is limited to the lesser of $1 million or 70% of net accounts receivable
less than 90 days old, and further limited by the amount of the term loan
outstanding that is in excess of cash collateral. The term loan is due monthly
with principal and interest payments through December 2004. The Company is
required to maintain certain financial covenants on a monthly basis. Those
covenants include a minimum quick asset ratio of 1 to 1, increasing to 1.4 to 1
in September 2002, and a minimum tangible net worth of $3,650,000, plus 50% of
quarterly income if any.
If Navidec substantially completes its rights offering it should generate net
proceeds of approximately $1.4 million and we will have funds needed to pay off
its bank loan, and bring other creditors current. If, however, the Company is
unable to complete it's rights offering, we may not be able to comply with loan
agreement and keep other creditors current. If the Company is unable to meet the
requirements of its loans and creditors, it may be required to pay the balance
of its term loan, and capital leases.
Additionally, if we fail to substantially complete the rights offering or raise
a substantial amount of capital from some other unknown source we will be out of
compliance with certain Nasdaq SmallCap listing requirements which could
negatively impact our trading markets in time.
If Navidec is not able to maintain compliance with its debt covenants, the
Company will seek to renegotiate or obtain alternative financing. The Company
has implemented a plan of action in order to sustain operations and satisfy the
financial covenants on its credit facilities. During 2002, the Company
significantly reduced costs through headcount reductions and reduction of
operating expenses. The Company continues to evaluate its contractual
obligations and is seeking to renegotiate certain of these obligations in order
to further reduce costs. The Company believes that its cash and cash
equivalents, working capital, and the completion of its rights offering will
sustain operations until the end of 2003. However, there can be no guarantee the
Company
18
will be successful in the completion of its rights offering. If the Company is
unable to complete its rights offering it does not have the financial resources
that will enable continue operations through the end of 2003.
On a longer-term basis, the Company believes that if the rights offering is
fully subscribed to allows for the repayment of its debt we will that it will
generate sufficient cash flow from operations to fund its long-term plan. If,
however, our capital requirements or cash flow vary from our current projections
or if unforeseen circumstances occur, we may require additional financing sooner
than we anticipate. Failure to raise necessary capital could restrict our
growth, limit our development of new products and services or hinder our ability
to compete.
Navidec is subject to various contractual obligations including long-term debt,
capital leases, and operating leases. The table below summarizes these
contractual obligations by year (in thousands):
Less than
Total 1 year 1-3 yrs. Thereafter
----- --------- -------- ----------
Long-term debt,
including current portion $ 307 $ 307 $ -- $ --
Capital leases 148 148 -- --
Operating leases 168 168 -- --
----- --------- ---- ----
Total contractual cash obligations $ 623 $ 623 $ -- $ --
===== ========= ==== ====
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001 the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." This statement requires companies to recognize the fair value of
an asset retirement liability in the financial statements by capitalizing that
cost as part of the cost of the related long-lived asset. The asset retirement
liability should then be allocated to expense by using a systematic and rational
method. The statement is effective for fiscal years beginning after June 15,
2002. Adoption of this statement is not expected to have a significant impact on
the Company's financial position or results of operations.
In April 2002, the FASB approved for issuance Statements of Financial Accounting
Standards No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of
SFAS 13, and Technical Corrections" ("SFAS 145"). SFAS 145 rescinds previous
accounting guidance, which required all gains and losses from extinguishment of
debt be classified as an extraordinary item. Under SFAS 145 classification of
debt extinguishment depends on the facts and circumstances of the transaction.
SFAS 145 is effective for fiscal years beginning after May 15, 2002 and adoption
is not expected to have a material effect on the Company's financial position or
results of its operations.
In July 2002, the FASB issued Statements of Financial Accounting Standards No.
146, "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS
146). SFAS 146 requires companies to recognize costs associated with exit or
disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. Examples of costs covered by SFAS 146
include lease termination costs and certain employee severance costs that are
associated with a restructuring, discontinued operation, plant closing, or other
exit or disposal activity. SFAS 146 is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002. The adoption of SFAS 146
is not expected to have a material effect on the Company's financial position or
results of its operations.
19
In December 2002, the FASB issued Statements of Financial Accounting Standards
No.148, "Accounting for Stock-Based compensation - Transition and Disclosure -
an amendment of FASB Statement 123" (SFAS 123). For entities that change their
accounting for stock-based compensation from the intrinsic method to the fair
value method under SFAS 123, the fair value method is to be applied
prospectively to those awards granted after the beginning of the period of
adoption (the prospective method). The amendment permits two additional
transition methods for adoption of the fair value method. In addition to the
prospective method, the entity can choose to either (i) restate all periods
presented (retroactive restatement method) or (ii) recognize compensation cost
from the beginning of the fiscal year of adoption as if the fair value method
had been used to account for awards (modified prospective method). For fiscal
years beginning December 15, 2003, the prospective method will no longer be
allowed. The Company currently accounts for its stock-based compensation using
the intrinsic value method as proscribed by Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" and plans on continuing using
this method to account for stock options , therefore, it does not intend to
adopt the transition requirements as specified in SFAS 148. The Company has
adopted the new SFAS 148 disclosure requirements of SFAS 148 in these financial
statements.
FORWARD LOOKING STATEMENTS
Forward-looking statements in this Form 10-K, including, without limitation,
statements relating to our plans, strategies, objectives, expectations,
intentions and adequacy of resources, are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements involve known and unknown risks, uncertainties, and
other factors that may cause our actual results, performance or achievements to
be materially different from any future results, performance or achievements
expressed or implied by the forward-looking statements. These factors include,
among others, the following: ability to obtain additional financing; our limited
operating history; our incubation strategy; unknown liabilities associated with
future acquisitions; availability of qualified personnel; ability to manage
growth; changes in technology; future government regulations; and other factors
described in this Form 10-K or in other of our filings with the Securities and
Exchange Commission. We are under no obligation, to publicly update or revise
any forward looking statements, whether as a result of new information, future
events or otherwise.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Navidec is exposed to the impact of interest rate changes and change in the
market values of its investments. Based on our market risk sensitive instruments
outstanding as of December 31, 2001, as described below, we have determined that
there was no material market risk exposure to our consolidated financial
position, results of operations, or cash flows as of such date. We do not enter
into derivatives or other financial instruments for trading or speculative
purposes.
INTEREST RATE RISK - At December 31, 2002, Navidec's exposure to market rate
risk for changes in interest rates relates primarily to its borrowings. Navidec
has not used derivative financial instruments in its credit facilities. At
December 31, 2002, the company had $233,000 of debt outstanding at a floating
interest rate of Prime + 1.50% with a floor of 8.4% (8.4% at December 31, 2002).
The estimated fair value of our long-term debt approximates its carrying value
because of the variable rates. The debt matures as follows:
20
2003 - $233,000. A hypothetical 10% increase in the Prime rate would not be
significant to the Company's financial position, results of operations, or cash
flows.
INVESTMENT RISK - Navidec has had investments in equity instruments in
information technology companies for business and strategic purposes. These
investments are included in other long-term assets and are accounted for under
the cost method since ownership is less than twenty percent (20%) and Navidec
does not assert significant influence. As of December 31, 2002, the Company
didn't have any investments in equity instruments.
21
ITEM 8. FINANCIAL STATEMENTS.
NAVIDEC, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors Report F-2
Consolidated Balance Sheets as of December 31, 2001 and 2002 F-4
Consolidated Statements of Operations for the Years Ended
December 31, 2000, 2001 and 2002 F-5
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 2000, 2001 and 2002 F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, 2001 and 2002 F-7
Notes to Consolidated Financial Statements F-8
F-1
INDEPENDENT AUDITORS REPORT
Board of Directors
Navidec, Inc.
Greenwood Village, Colorado
We have audited the accompanying consolidated balance sheet of Navidec, Inc. and
subsidiaries (the "Company") as of December 31, 2002, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides 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 Navidec, Inc. and
subsidiaries as of December 31, 2002 and the results of their operations and
their cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company suffered operating losses during fiscal 2002
and 2001 and is required to pay a bank loan totaling $233,000 by March 31, 2003
that raise substantial doubt about its ability to continue as a going concern.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
HEIN + ASSOCIATES LLP
Denver, Colorado
February 28, 2003
F-2
The following report of independent public accountants is a copy of a previously
issued Arthur Andersen LLP report and has not been reissued by Arthur Andersen
LLP.
TO THE SHAREHOLDERS OF NAVIDEC, INC.:
We have audited the accompanying consolidated balance sheets of NAVIDEC, INC. (a
Colorado corporation) and subsidiaries as of December 31, 2001 and 2000, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the three years ended December 31, 2001. These consolidated financial
statements are the responsibility of Navidec's management. Our responsibility is
to express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 Navidec, Inc. and
subsidiaries as of December 31, 2001 and 2000 and the results of their
operations and their cash flows for the three years ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company must maintain minimum financial ratios in
order to comply with its debt covenants. As a result of the Company's
outstanding debt and uncertainty about the Company's ability to maintain
compliance with its debt covenants, substantial doubt exists about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1. The financial statements do not include
any adjustments relating to the recoverability and classification of asset
carrying amounts or the amount and classification of liabilities that might
result should the Company be unable to continue as a going concern.
ARTHUR ANDERSEN LLP
Denver, Colorado,
April 3, 2002.
F-3
NAVIDEC, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31,
2001 2002
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,465 $ 130
Restricted cash 1,200 --
Accounts receivable, net 2,475 439
Inventory -- 288
Prepaid expenses- 352 648
Other Current Assets -- 48
-------- --------
Total current assets 6,492 1,553
PROPERTY, EQUIPMENT AND SOFTWARE, net 3,497 1,922
OTHER ASSETS:
Investment in CarPoint 588 --
Other investments 17 --
Other assets 18 1
-------- --------
TOTAL ASSETS $ 10,612 $ 3,476
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,511 670
Accrued liabilities 1,153 138
Current borrowings 843 455
Deferred revenue 144 108
-------- --------
Total current liabilities 4,651 1,371
NON CURRENT LIABILITIES:
Long-term borrowings 927 --
Other 67 --
Convertible Debentures -- 250
COMMITMENTS AND CONTINGENCIES (Notes 5, 6)
STOCKHOLDERS' EQUITY:
Common stock, no par value, 20,000 shares authorized,
Voting 608 and 611 shares outstanding 54,532 54,450
Non-voting stock, no par value, 39 and
39 shares outstanding 5,817 5,817
Warrants for common stock 1,175 1,175
Accumulated other comprehensive income (12) --
Deferred compensation (191) (38)
Retained earnings (deficit) (56,354) (59,549)
-------- --------
Total stockholders' equity 4,967 1,855
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,612 $ 3,476
======== ========
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
F-4
NAVIDEC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Year Ended
December 31,
2000 2001 2002
REVENUE $ 33,078 $ 22,587 $ 5,120
COST OF REVENUE 17,286 13,147 2,846
-------- -------- -------
GROSS PROFIT 15,792 9,440 2,274
OPERATING EXPENSES:
Product development 6,268 4,102 147
General and administrative 15,954 7,827 2,062
Sales and marketing 13,306 7,059 952
Restructuring charges -- 4,442 --
Loss on impairment of assets -- 1,314 --
Loss on restructured receivable 4,016 -- --
Non cash stock expense -- 600 71
Depreciation and amortization 3,268 3,016 1,947
-------- -------- -------
Total operating expenses 42,812 28,360 5,179
-------- -------- -------
Loss from operations (27,020) (18,920) (2,905)
OTHER INCOME (EXPENSE):
DriveOff.com debt conversion incentive payment (5,195) -- --
Gain on sale of DriveOff.com 43,302 -- --
Impairment of investments (5,317) (44,903) --
Gain on issuance of DriveOff.com equity 18,291 -- --
Interest income 1,153 223 32
Interest expense (907) (215) (219)
Realized gain (loss) on investment -- 208 (17)
Other (expense) income 47 (239) (86)
-------- -------- -------
Total other income (expense), net 51,374 (44,926) (290)
-------- -------- -------
NET INCOME (LOSS) BEFORE TAXES
AND EXTRAORDINARY GAIN 24,354 (63,846) (3,195)
PROVISION (BENEFIT) FOR TAXES 8,000 (8,000) --
-------- -------- -------
NET INCOME (LOSS) BEFORE EXTRAORDINARY GAIN 16,354 (55,846) (3,195)
EXTRAORDINARY GAIN -- 450 --
-------- -------- -------
NET INCOME (LOSS) $ 16,354 $(55,396) $(3,195)
======== ======== =======
NET INCOME (LOSS) BEFORE EXTRAORDINARY GAIN:
Per share basic $ 26.46 $ (86.40) $ (4.92)
Per share diluted $ 24.66 $ (86.40) $ (4.92)
======== ======== =======
EXTRAORDINARY GAIN, per share basic $ 0.00 $ 0.72 $ (4.92)
======== ======== =======
EXTRAORDINARY GAIN, per share diluted $ 0.00 $ 0.72 $ (4.92)
======== ======== =======
NET INCOME (LOSS):
Per share basic $ 26.46 $ (85.68) $ (4.92)
======== ======== =======
Per share diluted $ 26.46 $ (85.68) $ (4.92)
======== ======== =======
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 620 647 649
Diluted 664 647 649
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-5
NAVIDEC, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
Warrants
Voting Non-Voting for
Common Stock Common Stock Common
Shares Amount Shares Amount Stock
------ ------ ------ ------ -----
Balances, December 31, 1999 603 $ 54,910 -- $ -- $ 1,207
Conversion of unsecured
promissory notes to common stock - -- -- 39 5,817 --
Stock issuance costs -- (1,400) -- -- --
Exercise of warrants 2 176 -- -- (66)
Exercise of employee stock options 10 571 -- -- --
Treasury stock (7) (482) -- -- --
Net income -- -- -- -- --
Unrealized gain on investments,
net of taxes of $470
Comprehensive income -- -- -- -- --
--- -------- -- -------- --------
Balances, December 31, 2000 608 $ 53,775 39 $ 5,817 $ 1,141
Issuance of repriced options -- 883 -- -- --
Amortization for accelerated
vesting of options -- -- -- -- --
Cancellation of repriced options -- (126) -- -- --
Amortization of deferred compensation -- -- -- -- --
Warrants issued -- -- -- -- 34
Net loss -- -- -- -- --
Unrealized loss on investments,
net of taxes of $(470) and
reclassification adjustment for
realized gain of $208 -- -- -- -- --
Comprehensive loss -- -- -- -- --
--- -------- -- -------- --------
Balances, December 31, 2001 608 $ 54,532 39 $ 5,817 $ 1,175
Cancellation of repriced options -- (82) -- -- --
Exercise of Employee stock options 3 -- -- -- --
Amortization of deferred compensation -- -- -- -- --
Net Loss -- -- -- -- --
Realization of Comprehensive loss -- -- -- -- --
Comprehensive Loss -- -- -- -- --
--- -------- -- -------- --------
Balances, December 31, 2002 611 $ 54,450 39 $ 5,817 $ 1,175
=== ======== == ======== ========
Accumulated
Other Compre- Total
Compre- Accum- hensive Stock-
hensive ulated Income Deferred holders'
Income Deficit (Loss) Compensation Equity
------ ------- ---- ------------ ------
Balances, December 31, 1999 $ 290 $(17,312) $ -- $ 39,095
Conversion of unsecured
promissory notes to common stock - -- -- -- -- 5,817
Stock issuance costs -- -- -- -- (1,400)
Exercise of warrants -- -- -- -- 110
Exercise of employee stock options -- -- -- -- 571
Treasury stock -- -- -- -- (482)
Net income -- 16,354 $ 16,354 -- 16,354
Unrealized gain on investments,
net of taxes of $470 502 -- 502 -- 502
--------
Comprehensive income -- -- $ 16,856 -- --
----- -------- ======== ----- --------
Balances, December 31, 2000 $ 792 $ (958) -- 60,567
Issuance of repriced options -- -- -- (883) --
Amortization for accelerated
vesting of options -- -- -- 234 234
Cancellation of repriced options -- -- -- 126 --
Amortization of deferred compensation -- -- -- 332 332
Warrants issued -- -- -- -- 34
Net loss -- (55,396) $(55,396) -- (55,396)
Unrealized loss on investments,
net of taxes of $(470) and
reclassification adjustment for
realized gain of $208 (804) -- (804) -- (804)
--------
Comprehensive loss -- -- $(56,200) -- --
----- -------- ======== ----- --------
Balances, December 31, 2001 $ (12) $(56,354) $(191) $ 4,967
Cancellation of repriced options -- -- -- 82 --
Exercise of Employee stock options -- -- -- -- --
Amortization of deferred compensation -- -- -- 71 71
Net Loss -- (3,195) $ (3,195) -- (3,195)
Realization of Comprehensive loss 12 -- 12 -- 12
Comprehensive Loss -- -- $ (3,183) -- --
----- -------- ======== ----- --------
Balances, December 31, 2002 -- $(59,549) $ (38) $ 1,855
===== ======== ===== ========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-6
NAVIDEC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
2000 2001 2002
---- ---- ----
Cash flows from operating activities:
Net income (loss) $ 16,354 $(55,396) $ (3,195)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization 3,268 3,016 1,947
Extraordinary gain -- (450) --
Non cash interest expense 249 -- --
Provision for bad debt expense 155 796 268
Write-off of notes receivable and accrued interest -- 1,661 --
Provision (benefit) for deferred taxes 8,000 (8,000) --
Gain on sale of DriveOff.com (56,398) -- --
Loss (Gain) on sale of investments -- (208) 16
Write down of investments 9,333 44,903 --
Non-cash stock expense -- 600 71
Loss on sale of assets -- 48 --
Impairment charges -- 1,314 --
Changes in operating assets and liabilities:
Restricted cash -- (1,200) 1,200
Accounts receivable (7,447) 1,576 1,768
Costs and estimated earnings in excess of billings (1,397) 1,545 --
Inventory 138 191 64
Prepaid expenses and other assets 470 515 (1,048)
Accounts payable (1,000) 149 (1,841)
Bank overdrafts (149) -- --
Accrued liabilities and other 900 (2,082) (1,051)
-------- -------- --------
Net cash used in operating activities (27,524) (11,022) (1,801)
Cash flows from investing activities:
Purchase of property, equipment and software (4,304) (1,014) (61)
Proceeds from sale of equipment -- 232 41
Repayment of notes receivable -- 2,100 --
Funding of notes receivable (3,700) -- --
Proceeds from the sale of marketable debt securities 6,865 2,990 --
Funding of notes receivable related parties -- (528) --
Settlement costs from CarPoint sale -- (815) --
Additional purchase consideration (700) -- --
Sale (Purchase) of investments (1,880) 7,736 601
-------- -------- --------
Net cash provided by (used in) investing activities (3,719) 10,701 581
Cash flows from financing activities:
Payments on notes payable and capital lease obligations (867) (1,689) (1,867)
Proceeds from borrowing -- 1,000 485
Proceeds from issuance of convertible debt -- -- 250
Proceeds from exercise of stock options 571 -- --
Proceeds from exercise of warrants 110 -- --
Repurchase of common stock (482) -- --
Payment for offering and deferred financing costs (540) -- 17
Other 66 -- --
-------- -------- --------
Net cash provided by (used in) financing activities (1,142) (689) (1,115)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (32,385) (1,010) (2,335)
Cash and cash equivalents, beginning of year 35,860 3,475 2,465
-------- -------- --------
Cash and cash equivalents, end of year $ 3,475 $ 2,465 $ 130
======== ======== ========
Cash paid for interest $ 907 $ 215 $ 219
-------- -------- --------
Cash paid for taxes -- -- --
-------- -------- --------
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-7
NAVIDEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION, BUSINESS AND LIQUIDITY
Navidec, Inc., a Colorado corporation (Navidec or the "Company"), was
incorporated in 1993. Navidec provides solutions to help organizations mange
secure access to web applications within enterprise and across the business
value chain. Navidec enables organizations to deliver single sign on
capabilities to their employees, customers, suppliers and partners by providing
an identity management infrastructure for user management, access control, and
single entry point to personalized enterprise resources. Navidec provides
consulting and engineering services in Access Management, User Management,
Personalization and application Integration.
Navidec is subject to various risks and uncertainties frequently encountered by
companies in the rapidly evolving market for Internet-based products and
services. Such risks and uncertainties include, but are not limited to, an
evolving and unpredictable business model and the management of rapid growth. To
address these risks, the Company must, among other things, maintain and increase
its customer base, implement and successfully execute its business and marketing
strategy, continue to develop and upgrade its technology, provide superior
customer service and attract, retain and motivate qualified personnel. There can
be no guarantee that the Company will be successful in addressing such risks.
During 2001, Navidec borrowed $1 million on a term loan due in 36 monthly
installments through December 2004. As part of this agreement, Navidec was
required to maintain certain minimum financial covenants on a monthly basis.
Since the inception of the agreement, Navidec was not in compliance with these
covenants. In April 2002, the Company amended the term loan agreement to waive
the past covenant violations and revise the required financial covenants. The
amended covenants include a minimum quick asset ratio of 1 to 1, increasing to
1.4 to 1 in September 2002, and a minimum tangible net worth. The quick asset
ratio is the ratio of cash deposited with the lender plus accounts receivable to
current liabilities less deferred revenue. At December 31, 2001, the Company's
quick asset ratio was .8 to 1. The minimum tangible net worth is $3,650,000,
plus 50% of quarterly net income, if any. During the third quarter of 2002 the
Company went out of compliance with the loan agreement and as such renegotiated
for the loan to be paid down to $233,000 by December 31, 2002, after which the
Company would have interest only payments through February 28, 2003 and to pay
the loan off by March 31, 2003.
If Navidec completes its rights offering, the Company will be able to pay off
the bank and be in compliance with its loan covenants. However, Navidec's
ability to meet this requires that the Company complete approximately 25% of the
rights offering. As of this date there is no guarantees that the company will
complete its offering. If Navidec is not able to maintain compliance with its
debt covenants, the Company will seek to renegotiate or obtain alternative
financing. The Company has implemented a plan of action in order to sustain
operations and satisfy the financial covenants on its credit facilities. During
2001 and 2002, the Company significantly reduced costs through headcount
reductions. The Company continues to evaluate its current contractual
obligations for renegotiation in order to further reduce costs. The company
would consider further significant reductions in its operating activities if
these funds are insufficient to sustain operations, or the financial covenants
are in jeopardy of being violated in 2003. The Company believes that its cash
and cash equivalents, working capital, is
F-8
not sufficient to maintain operations through 2003. However, the Company
believes that its rights offering and convertible debentures will give the
Company the working capital it needs to sustain operations through December 31,
2003. There are no guarantee the Company will be successful in these efforts.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern, as a result of the Company suffering
operating losses during fiscal 2001 and 2002. As a result of the Company's
outstanding debt and uncertainty about the Company's ability to pay this debt in
accordance with current terms, substantial doubt exists about the Company's
ability to continue as a going concern. The accompanying financial statements do
not include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result should Navidec be unable to continue as a going concern.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Navidec and its wholly-owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.
Minority investments in entities over which Navidec exercises significant
influence through its board representation or ownership of equity securities are
accounted for using the equity method. Other minority interests in private
companies are accounted for at the lower of cost or net realizable value.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities, 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 AND CASH EQUIVALENTS
For purposes of reporting cash flows, Navidec considers cash and cash
equivalents to include highly liquid investments with original maturities of 90
days or less that are readily convertible into cash and are not subject to
significant risk from fluctuations in interest rates. The recorded amounts for
cash equivalents approximate fair value due to the short-term nature of these
financial instruments.
RESTRICTED CASH
In connection with renegotiating its office lease during 2001, the Company was
required to invest $1.2 million in certificates of deposit. The lessor through
renegotiations of the Company's leases requested remittance of the $1.2 million
in certificates of deposits for satisfaction of the lease, which expires in
December 2003. Accordingly, $1.2 million was recorded as restricted cash in the
accompanying consolidated balance sheet at December 31, 2001. During 2002, the
landlord received $1.2 million of
F-9
the Company's restricted cash, which is to be applied to future rent payments.
As such there is no restricted cash as December 31, 2002.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject Navidec to significant
concentrations of credit risk include cash and cash equivalents, marketable debt
securities and accounts receivable. The Company maintains its cash and
investment balances in the form of bank demand deposits, money market accounts,
commercial paper and short-term notes with financial institutions that
management believes to be of high credit quality. Accounts receivable are
typically unsecured and are derived from transactions with and from customers
primarily located in the United States.
Navidec performs ongoing evaluations of its customers' financial condition and
generally does not require collateral, except for billings in advance of work
performed. Allowances for uncollectible accounts receivable are determined based
upon information available and historical experience. Accounts receivable are
shown net of an allowance for doubtful accounts of $2,281,000 and $2,021,000 as
of December 31, 2002 and 2001, respectively. In addition to its allowance for
doubtful accounts Navidec fully reserved $1,661,000 for notes receivable and
accrued interest from Westar Financial, which declared bankruptcy in December of
2001.
Sales to unaffiliated customers which represents 10% or more of the Company's
Sales for the year ended December 31, 2002 were as follows (as a percentage of
sales):
Customer 2002
- -------- ----
A 20.5%
No customers represented 10% or more of the company total revenue for 2000 or
2001.
INVESTMENTS
Investments in publicly traded equity securities over which Navidec does not
exercise significant influence are recorded at market value. Investments in
non-publicly traded equity securities or non-marketable equity securities are
stated at the lower of cost or estimated realizable value. Investments in equity
securities (excluding CarPoint-see Note 12) included the following for the year
ended December 31, 2001 and 2002 (in thousands):
December 31, 2002
Unrealized Carrying
Cost Loss Value
---- ---- -----
Marketable securities $ -- $ -- $ --
======= ========== ========
December 31, 2001
Unrealized Carrying
Cost Loss Value
---- ---- -----
Marketable securities $29,000 $ 12,000 $ 17,000
======= ========== ========
F-10
In 2001 Navidec sold marketable securities with a basis of $673,000 for
$881,000, realizing a gain of $208,000.
In 2002 Navidec sold marketable securities with a basis of $29,000 for $12,000,
realizing a loss of $17,000.
INVENTORY
Inventories are stated at the lower of cost (first-in, first-out) or market, and
consist primarily of products held for resale and use in on-line solutions.
Navidec wrote down the remaining products inventory to net realizable value of
$0 as of December 31, 2001. During 2001, Navidec exchanged its inventory of Java
Bean applets for rights to updated versions of these products. The value of the
inventory exchanged was carried at $320,000 during 2001. This inventory was
further written down in 2002 to $288,000.
PROPERTY, EQUIPMENT AND SOFTWARE
Equipment is stated at cost and depreciation is provided using the straight-line
method. Leasehold improvements are amortized using the straight-line method over
the shorter of the useful life of the improvement or the minimum term of the
lease. Maintenance and repairs are expensed as incurred and major additions,
replacements and improvements are capitalized.
Internal use software is amortized on a straight-line basis over its expected
economic life.
LONG-LIVED ASSETS
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. A long-lived asset is considered impaired when estimated future
cash flows related to the asset, undiscounted and without interest, are
insufficient to recover the carrying amount of the asset. If deemed impaired,
the long-lived asset is reduced to its estimated fair value.
Long-lived assets to be disposed of are reported at the lower of their carrying
amount or estimated fair value less cost to sell.
GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets are amortized on a straight-line basis over their
estimated useful lives of five years. Amortization expense was $177,000 for
2000. With the sale of DriveOff.com in 2000, the Company did not have any
goodwill or amortization in 2001 or 2002.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash and cash equivalents, trade receivables and payables
approximated their fair value because of their short-term nature. Investments in
debt securities are recorded at their amortized cost, which approximates fair
value because of their short-term maturity. Investments in marketable equity
securities are recorded at fair value based upon quoted market prices.
Investments in non-marketable equity securities are based upon recent sales of
similar securities by the investee and
F-11
approximate their carrying value. The Company's borrowings approximate their
carrying amounts based upon interest rates currently available to the Company.
REVENUE RECOGNITION
CONTRACT REVENUES
Revenues from fixed price and time and materials contracts are recognized on the
percentage of completion method for individual contracts. Revenues for fixed
price contracts are recognized once progress reaches a point where experience is
sufficient to estimate final results with reasonable accuracy. Revenues are
recognized in the ratio that costs incurred bear to total estimated contract
costs. Contract costs include all labor costs and those direct costs related to
contract performance. Changes in job performance, estimated profitability and
final contract settlements may result in revisions to costs and revenues in the
period in which the revisions are determined. Provisions for any estimated
losses on uncompleted contracts are made in the period in which such losses are
determinable. In instances when the work performed on fixed price agreements is
of relatively short duration, revenue is recognized when the work is completed.
Contract revenues are recorded net of reserves for revenue contingencies for
such items as contract or change order disputes. Reserves for revenue
contingencies were $1.6 million in 2001 and zero in 2002 and 2000.
PRODUCT SALES
Revenues from product sales are recognized when risk of loss passes to the
customer. Estimates of returns and allowances are recorded in the period of the
sale based on Navidec's historical experience and the terms of individual
transactions.
OTHER REVENUES
Revenues from hosting, maintenance and support agreements are recognized on a
straight-line basis over the life of the related agreement.
PRODUCT DEVELOPMENT
Costs incurred in the development of new products and enhancements to existing
products and services are charged to expense as incurred.
ADVERTISING COSTS
Advertising costs are expensed when the advertisement is released and are
included in sales and marketing expenses in the accompanying statements of
operations. Advertising expense totaled $5,078,000, $128,000, $14,000, in 2000,
2001 and 2002, respectively.
INCOME TAXES
The current provision for income taxes represents actual or estimated amounts
payable on tax return filings each year. Deferred tax assets and liabilities are
recorded for the estimated future tax effects of temporary differences between
the tax basis of assets and liabilities and amounts reported in the accompanying
balance sheets, and for operating loss and tax credit carryforwards. The change
in
F-12
deferred tax assets and liabilities for the period measures the deferred tax
provision or benefit for the period. Effects of changes in enacted tax laws on
deferred tax assets and liabilities are reflected as adjustments to the tax
provision or benefit in the period of enactment. Navidec's deferred tax assets
have been reduced by a valuation allowance to the extent it was deemed more
likely than not, that some or all of the deferred tax assets would not be
realized.
STOCK-BASED COMPENSATION
The Company accounts for its employee stock-based compensation arrangements
using the intrinsic value method under which compensation expense related to
employee stock grants is recorded if the fair value of the underlying stock
exceeds the exercise price on the measurement date.
The Company accounts for warrants issued to non-employees using the fair value
method. During 2001, warrants given to a third party vendor for marketing
services provided were valued at $34,000 and are included in sales and marketing
in the table below.
The Company has segregated these costs and presented non cash stock expense in
the accompanying consolidated statements of operations. The allocation of non
cash stock expense to the same functional classification as the employees' cash
compensation is as follows:
For the Twelve Months Ended
December 31,
2000 2001 2002
---- ---- ----
(In Thousands)
Cost of revenue $ -- $ 111 $ 13
Sales and marketing -- 99 3
General and administrative -- 390 55
---- ----- ----
Total non cash stock expense $ -- $ 600 $ 71
ACCRUALS
Accrued expenses include the following at December 31 (in thousands):
2000 2001 2002
---- ---- ----
Accrued compensation and commissions $ 622 $ 400 $ 34
Fees payable on sale of DriveOff.com 1,458 -- --
Accrued restructuring charges -- 753 50
Other 950 -- 54
------ ------ ------
$3,030 $1,153 $ 138
====== ====== ======
SALE OF STOCK BY SUBSIDIARIES AND EQUITY METHOD INVESTEES
The Company recognizes gains and losses from the sale of stock by its
subsidiaries and equity method investees in its statements of operations when
realization of the gain is reasonably assured.
NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed by dividing the net income (loss)
available to common shareholders for the period by the weighted average number
of common shares outstanding for the
F-13
period. Diluted net income (loss) per share is computed by dividing the net
income (loss) for the period by the weighted average number of common and
potential common shares outstanding during the period, if the effect of the
potential common shares is dilutive.
Shares used in the computation of diluted earnings per share, using the treasury
stock method, were as follows (in thousands):
December 31,
2000 2001 2002
---- ---- ----
Weighted average common shares 620 647 649
Stock options 41 -- --
Warrants 3 -- --
--- --- ---
Weighted average diluted shares 664 647 649
=== === ===
Potentially dilutive securities, which have been excluded from the determination
of diluted earnings per share because their effect would be anti-dilutive, are
as follows:
2000 2001 2002
Navidec stock options 111 47 285
Convertible debt 701 -- --
Warrants 298 125 21
----- ---- ----
Total anti-dilutive shares excluded 1,110 172 306
===== ==== ====
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes the following adjustments to net income
(loss) for the years presented (in thousands):
2000 2001 2002
Gross unrealized gain (loss) $ 972 $(1,066) $--
Reclassification adjustment for gain on sale -- (208) 12
Income taxes (470) 470 --
------- ------- -------
$ 502 $ (804) $ 12
======= ======= =======
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001 the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." This statement requires companies to recognize the fair value of
an asset retirement liability in the financial statements by capitalizing that
cost as part of the cost of the related long-lived asset. The asset retirement
liability should then be allocated to expense by using a systematic and rational
method. The statement is effective for fiscal years beginning after June 15,
2002. Adoption of this statement is not expected to have a significant impact on
the Company's financial position or results of operations.
In April 2002, the FASB approved for issuance Statements of Financial Accounting
Standards No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of
SFAS 13, and Technical Corrections" ("SFAS 145"). SFAS 145 rescinds previous
accounting guidance, which required all gains and losses from extinguishment of
debt be classified as an extraordinary item. Under SFAS 145 classification of
debt extinguishment depends on the facts and circumstances of the transaction.
SFAS 145 is effective
F-14
for fiscal years beginning after May 15, 2002 and adoption is not expected to
have a material effect on the Company's financial position or results of its
operations.
In July 2002, the FASB issued Statements of Financial Accounting Standards No.
146, "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS
146). SFAS 146 requires companies to recognize costs associated with exit or
disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. Examples of costs covered by SFAS 146
include lease termination costs and certain employee severance costs that are
associated with a restructuring, discontinued operation, plant closing, or other
exit or disposal activity. SFAS 146 is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002. The adoption of SFAS 146
is not expected to have a material effect on the Company's financial position or
results of its operations.
In December 2002, the FASB issued Statements of Financial Accounting Standards
No.148, "Accounting for Stock-Based compensation - Transition and Disclosure -
an amendment of FASB Statement 123" (SFAS 123). For entities that change their
accounting for stock-based compensation from the intrinsic method to the fair
value method under SFAS 123, the fair value method is to be applied
prospectively to those awards granted after the beginning of the period of
adoption (the prospective method). The amendment permits two additional
transition methods for adoption of the fair value method. In addition to the
prospective method, the entity can choose to either (i) restate all periods
presented (retroactive restatement method) or (ii) recognize compensation cost
from the beginning of the fiscal year of adoption as if the fair value method
had been used to account for awards (modified prospective method). For fiscal
years beginning December 15, 2003, the prospective method will no longer be
allowed. The Company currently accounts for its stock-based compensation using
the intrinsic value method as proscribed by Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" and plans on continuing using
this method to account for stock options , therefore, it does not intend to
adopt the transition requirements as specified in SFAS 148. The Company has
adopted the new SFAS 148 disclosure requirements of SFAS 148 in these financial
statements.
(3) PROPERTY, EQUIPMENT AND SOFTWARE
Property, equipment and software consists of the following (in thousands):
December 31,
Useful Lives 2001 2002
------------ ---- ----
Computers, software and equipment 3 to 4 years $ 3,203 $ 3,195
Software 3 years 2,301 2,313
Furniture and office equipment 4 to 5 years 2,450 2,450
Leasehold improvements Lease term 933 918
------- -------
8,887 8,876
Less accumulated depreciation (5,390) (6,954)
------- -------
Net property, equipment and software $ 3,497 $ 1,922
======= =======
Depreciation expense was $3,091,000, $3,016,000 and $1,552,000 2000, 2001 and
2002, respectively.
(4) BORROWINGS
In 2001, Navidec entered into a term credit facility for $1.0 million and a $3.5
million revolving line of credit. The line of credit is limited to 70% of
accounts receivable less than 90 days past due and is further reduced by 70% of
the amount outstanding under the term credit facility. Both notes are
F-15
collateralized by all assets of the Company and are governed by minimum adjusted
quick ratio (1.4 to 1) and minimum tangible net worth ($6,750,000) covenants, as
defined. In addition, the Company was to become subject to a quarterly minimum
debt service coverage ratios.
Borrowings consist of the following:
December 31,
2001 2002
---- ----
Term credit facility, due December 2004, with monthly payments
beginning January 2002, at $33,000 per month interest at 8.4% $1,000,000 $ --
Term credit facility, due March 31, 2003, with monthly payments of
interest and principle and interest due at maturity -- 233,000
Unsecured notes payable due June 30, 2003, interest at 10.0% -- 74,000
---------- ----------
1,000,000 307,000
Less - current 311,000 307,000
---------- ----------
Long term portion $ 689,000 $ --
========== ==========
As of December 31, 2002, the Company was not in compliance with its debt
covenants of the loan entered into in December 2000. The loan was paid down
during the third and fourth quarters of 2002 to $233,000, which is due and
payable on March 31, 2003.
During 2000, the Company settled its outstanding litigation regarding amounts
allegedly due a placement agent in connection with raising equity in prior
years. As part of the settlement, the Company issued an $860,000 promissory note
payable in 57 monthly payments of $13,333 and two payments of $50,000 due in
2002 and 2004. In 2001 the Company settled the debt and recognized an
extraordinary gain on the settlement of $450,000.
(5) CAPITAL LEASE OBLIGATIONS
Navidec has entered into several capital lease obligations for furniture,
computers and equipment. The leases have terms ranging from 36 to 60 months,
expiring at various times through 2004. Interest on the Company's capital lease
obligations are at rates ranging from 8% to 16%.
Equipment purchased under capital leases is included in the cost of property and
equipment and collateralizes the repayment of the capital lease obligations. The
following is a summary of property and equipment purchased under capital leases
as of December 31:
2001 2002
Furniture, computers and equipment $ 3,042,000 $ 2,965,000
Less - accumulated depreciation (1,458,000) (2,033,000)
----------- -----------
Net book value $ 1,584,000 $ 932,000
=========== ===========
Navidec acquired property of $1,498,000, $639,000 and $0 in 2000, 2001 and 2002,
respectively, under capital lease arrangements.
During 2001, Navidec recorded an impairment charge of $182,000 to write-down
leased workstations to their estimated fair value.
F-16
As of December 31, 2002, future minimum payments under the Company's capital
leases are as follows:
Capital Leases
--------------
Year ended December 31,
2003 171,000
---------
Total minimum payments 171,000
Less interest (23,000)
---------
Total obligation 148,000
Less - current portion (148,000)
---------
Long-term obligations $ --
=========
Cash paid for interest was $282,000 $215,000, and $57,000 in 2000, 2001 and
2002, respectively.
(6) CONVERTIBLE DEBENTURES
On September 16, 2002, the Company entered into a Debenture Purchase Agreement
with Interactive Capital, Inc. pursuant to which it and other qualified
purchasers may purchase a minimum of $250,000 and a maximum of $5 million in
aggregate principal amount of convertible debentures. The Company is obligated
to use the proceeds of the debentures to pay off a portion of our loans and
credit facility with Silicon Valley Bank and the balance for working capital.
Pursuant to the Debenture Purchase Agreement and a Convertible Debenture
Agreement, on October 1, 2002, the Company sold convertible debentures in an
aggregate principal amount of $250,000 to the principals of Interactive Capital,
Inc. and four other persons. The convertible debentures bear interest at a rate
of 5% per year from November 1, 2002 with interest due monthly. The debentures
are unsecured and are convertible in the Company's common stock at a conversion
price of $1.80 per share, they are redeemable at the Company's option in whole
or in part at a repurchase price of 100% of the principal amount plus accrued
and unpaid interest payable in cash provided that the registration statement
covering the shares issuable upon conversion of the debentures is in effect at
the time of redemption. The debentures mature on February 29, 2004, unless
earlier converted or redeemed by the Company.
As of January 21, 2003, the debenture was amended to provide that if the Holders
convert their debentures on or before the expiration of the Rights Offering, the
Holder would receive Rights to acquire the same number of common shares at a
price of $1.80 per share. The terms of the convertible debenture agreement
requires that the Company file a registration statement.
(7) INCOME TAXES
The provision for income taxes consists of the following (in thousands):
Year Ended December 31,
2000 2001 2002
---- ---- ----
Current:
Federal $ -- $ -- $ --
State -- -- --
Total current provision -- -- --
Deferred:
Federal 11,514 (20,398) (874)
State 1,086 (3,192) (79)
Valuation allowance (4,600) 15,590 953
-------- -------- --------
Total deferred provision (benefit) 8,000 (8,000) --
Total provision (benefit) $ 8,000 $ (8,000) $ --
======== ======== ========
F-17
Differences between the income tax expense reported in the statements of
operations and the amount reported by applying the statutory federal income tax
rate (35%) to earnings before income taxes are as follows:
Year Ended December 31,
2000 2001 2002
---- ---- ----
Expected rate 35.0% (35.0)% (35.0)%
State taxes, net of federal deduction 4.4 (3.2) (3.2)
Tax gain greater than book on DriveOff.com 11.7 -- --
Nondeductible goodwill amortization 0.3 -- --
Other permanent items 0.3 1.3 --
Valuation allowance (18.9) 24.4 38.2
----- ----- -----
32.8% (12.5)% 0.0%
===== ===== =====
The components of the net deferred income tax assets (liabilities) are as
follows (in thousands):
December 31,
2000 2001 2002
---- ---- ----
Current assets (liabilities):
Investments $ 3,255 $ (3) $ --
Accruals and other 2,935 (172) 77
Bad debt reserves 205 1,443 867
Valuation allowance -- (1,268) (944)
-------- -------- --------
6,395 -- --
Noncurrent assets (liabilities):
Basis difference in Carpoint (19,465) (53) --
Net operating losses 4,600 13,350 14,848
Property and equipment -- 1,025 751
Valuation allowance -- (14,322) (15,599)
-------- -------- --------
(14,865) -- --
-------- -------- --------
Net deferred tax liability $ (8,470) $ -- $ --
======== ======== ========
At December 31, 2002, for income tax purposes, Navidec had approximately $39
million of net operating loss carryforwards. Such net operating losses expire
between the years 2011 to 2022. The Tax Reform Act of 1986 contains provisions
that may limit the net operating loss carryforwards available to be used in any
given year if certain events occur, including significant changes in ownership
interests. The sale of Driveoff.com in 2000 reduced the net operating losses
available to the Company by approximately $18.4 million.
During 2001 and 2002, the Company increased its valuation allowance by
$15,590,000 and $953,000, respectively to fully reserve its net deferred tax
asset, primarily because of uncertainty relating to realizability of the
Company's net operating loss carryforwards.
Navidec paid no income taxes during the three years ended December 31, 2002.
F-18
(8) COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
Navidec leases certain facilities and equipment under operating leases that
expire at various times through 2004. Future minimum lease payments for such
operating leases are as follows as of December 31, 2002:
Year ended December 31
2003 $ 168,000
2004 --
2005 --
----------
$ 168,000
==========
Rental expense related to these leases was $1,896,000 $1,840,000 and $822,000
for 2000, 2001, and 2002, respectively.
DEFINED CONTRIBUTION PLAN
Navidec has a 401(k) profit sharing plan (the "Plan"). Subject to limitations,
eligible employees may make voluntary contributions to the Plan. The Company
may, at its discretion, make additional contributions to the Plan. The Company
contributed $64,000, $99,000 and $19,000, during 2000, 2001 and 2002,
respectively.
LITIGATION
In the normal course of business, Navidec is subject to, and may become a party
to, litigation. Management believes there are no claims currently in litigation
or unasserted matters that will have a material impact on the Company's
financial position or results of operations.
(9) RELATED PARTY TRANSACTIONS
In November 2000, Navidec loaned $35,000 to an officer of the Company carrying
an annual interest rate of 7% with principal and interest due on May 30, 2001.
The note and accrued interest was paid off in March of 2001.
During 2000, Navidec retained Benesch, Friedlander, Coplan & Aronoff LLP, of
which firm Navidec's former Executive Vice President -- Business Development,
was a partner during 2000, to perform legal services for the Company. The
Company paid $546,000, $84,000 and $9,000 in fees and expenses to Benesch,
Friedlander, Coplan & Aronoff LLP in 2000, 2001 and 2002, respectively, for the
performance of legal services for the Company.
In January of 2001, the Company funded promissory notes due from management and
shareholders totaling $528,000. These notes carried an interest rate of 5.9%
payable annually. The notes were collateralized by a right to proceeds agreement
that required the payment of the notes upon the sale of the CarPoint, Inc. stock
held by the Company. These notes receivable were settled in conjunction with the
sale of the CarPoint, Inc. stock in May 2001. The receivables were netted
against the amounts otherwise payable to these individuals for their involvement
in the initial sale of DriveOff.com in September 2000, and the sale of CarPoint
stock in May 2001.
F-19
During 2001, Navidec sold $52,000 worth of inventory at cost to XCEN28, Inc,
whose primary shareholder is the nephew of Navidec's CEO.
On September 16, 2002, the Company entered into a Debenture Purchase Agreement
with Interactive Capital, Inc. pursuant to which it and other qualified
purchasers may purchase a minimum of $250,000 and a maximum of $5 million in
aggregate principal amount of convertible debentures, whose primary shareholder
is John McKowen a director, officer and shareholder of Navidec, Inc. On October
1, 2002 the Company took down $250,000 of debentures. These debentures were lead
by Interactive Capital and placed with individuals, which included Mr. John
McKowen $85,000 and Mr. Ralph Armijo, President, CEO and Director $40,000.
In January 2003 the Company agreed to issue an option to purchase up to 16
million shares of the no par value common stock of Navidec Capital, Inc. to
Interactive Capital, Inc. for a period of five years, whose primary shareholder
is John McKowen a director, officer and shareholder of the Company. The exercise
price may be paid by exchanging common shares of Navidec for the common shares
of Navidec Capital at a ratio of one share of Navidec for each 172.8 shares of
Navidec Capital. Assuming a full exercise of this option, Interactive Capital
would have to deliver a total of 92,593 Navidec shares.
(10) STOCKHOLDERS' EQUITY
REVERSE STOCK SPLIT
During fiscal 2002, the Company approved a 1:18 reverse stock split.
Accordingly, all common stock, options and warrants, reflected in the
accompanied financial statements and notes reflect this split.
OFFERINGS
The following table summarizes Common Stock and Warrants issued in connection
with public and private offering since Navidec went public in February 1997:
Warrants Warrant Cost of
-------- ------- -------
Description Date Shares Issued w/ offering Share Price Strike Price Offering Net Proceeds
----------- ---- ------ ------------------ ----------- ------------ -------- ------------
Initial Public Offering 2/1997 55,556 55,556 $106.20 $129.60 $1,094,000 $ 3,436,000
Private Placement 1997-98 33,028 33,028 79.20 129.60 482,000 2,193,000
Broker Warrants 6,603 -- 81.00
Private Placement 11/1998 38,889 -- 36.00 -- 70,000 1,330,00
Public Warrant Call 2/1999 106,556 -- 129.60 -- 100,000 13,810,000
Private Placement 9/1999 22,823 -- 166.50 -- 406,000 3,394,000
Public Offering 10/1999 145,835 5,556 166.50 166.50 2,555,000 21,726,000
Private Placement
Non-voting Common 10/2000 38,984 -- 166.50 -- -- 5,817,000
ISSUANCE OF NON-VOTING COMMON
On October 12, 2000, the shareholders of Navidec voted to amend the Company's
Amended and Restated Articles of Incorporation to allow for the issuance of
non-voting common shares. Subsequently, convertible debt held by WFC Holdings
Corp. ("WFC") was exchanged for 38,984 non-voting common shares.
F-20
ISSUANCE OF WARRANTS
The following table summarizes activity for warrants issued:
2000 2001 2002
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding at
beginning of year 16,573 $ 112.74 15,397 $ 115.10 20,953 $ 86.96
Granted -- -- 5,556 9.00 -- --
Exercised (1,176) 81.94 -- -- -- --
Forfeited and cancelled (--) -- -- -- -- --
------ ---------- ------ ---------- ------ ---------
Outstanding at end of year 15,397 $ 115.10 20,953 $ 86.96 20,953 $ 86.96
------ ---------- ------ ---------- ------ ---------
Exercisable at end of year 15,397 $ 115.10 20,953 $ 86.96 20,953 $ 86.96
------ ---------- ------ ---------- ------ ---------
Weighted average fair value
of warrants granted during year N/A $ 6.10 N/A
========== ========== =========
The following table summarizes the warrants outstanding for the Company's common
stock as of December 31, 2002:
Original
Exercise Issuance Remaining
Warrants Units Price Value Contractual Life
- -------- ----- ----- ----- ----------------
A 885 $ 132.84 $ 13,000 .25 years
B 659 $ 81.00 45,000 .25 years
C 85 $ 63.00 3,000 .25 years
D 210 $ 81.00 10,000 .25 years
E 4,363 $ 81.00 202,000 .25 years
F 2,251 $ 36.00 88,000 1.00 years
G 6,944 $ 166.50 780,000 1.75 years
H 5,556 $ 9.00 34,000 4.00 years
------ ----------
20,953 $1,175,000
====== ==========
SHARE REPURCHASE PLAN
On October 12, 2000, the board of directors of Navidec authorized the repurchase
of up to 55,556 shares of the Company's common stock. As of December 31, 2001,
the Company had purchased approximately 7,000 shares at an average price of
$68.40 and retired them in accordance with Colorado State Law.
STOCK OPTION PLAN
The Company has adopted a Stock Option Plan (the "Plan") under which the Company
is authorized to grant incentive and non-qualified stock options to acquire up
to 2,000,000 shares of the Company's common stock to employees and directors of
the Company. Under the Plan, the exercise price per share of a non-qualified
stock option must be equal to at least 50% of the fair market value of the
common stock on the date of grant. Options granted vest over various terms with
a maximum vesting period of five years and expire after a maximum of 10 years.
On October 12, 2000, the shareholders of Navidec approved an amendment to
increase from 2,000,000 to 3,000,000 the number of shares of common stock
issuable under the Plan.
F-21
In the third quarter of 2001, the Company canceled approximately 74,000
unexercised and outstanding options and granted 49,000 replacement options with
a strike price of $0.00. The new options vest over three years and expire 10
years from the date of grant. The Company recorded deferred compensation of
$883,000 on the date of grant for the difference between the strike price and
the intrinsic value of the repriced options. The deferred compensation charge
will be amortized to stock expense over the vesting period of the new options.
During 2001, 7,000 options were cancelled in conjunction with employee layoffs
and the related deferred compensation previously recorded was reversed during
2001. In addition, options granted to executives that were terminated in the
fourth quarter received accelerated vesting and the remaining deferred
compensation expense related to those executives' options was recognized as
compensation expense. The weighted average remaining contractual life of these
options is 6.60 years. The weighted average grant date fair value of these
options was $18.00.
The following table summarizes activity for options issued in the money:
2001 2002
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
Outstanding at beginning of year -- -- 42,000 $0.00
Granted 49,000 $ 0.00 -- --
Exercised -- -- (3,000) $0.00
Forfeited and cancelled (7,000) $ 0.00 (4,000) $0.00
------ -------- ------ -----
Outstanding at end of year 42,000 $ 0.00 35,000 $0.00
------ -------- ------ -----
Exercisable at end of year 19,000 $ 0.00 27,000 $0.00
------ -------- ------ -----
The following table summarizes activity for options issued at the money:
2000 2001 2002
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding at beginning of year 86,111 $ 102.60 110,889 $ 113.04 5,278 $ 129.06
Granted 41,500 128.52 -- -- 250,000 $ 1.80
Exercised (10,389) 53.10 -- -- -- --
Forfeited and cancelled (6,333) 171.90 (105,611) $ 135.18 (5,278) $ 129.06
------- ---------- -------- ---------- ------- ----------
Outstanding at end of year 110,889 $ 113.04 5,278 $ 125.46 250,000 $ 1.80
------- ---------- -------- ---------- ------- ----------
Exercisable at end of year 42,056 $ 94.86 5,000 $ 129.06 -- --
------- ---------- -------- ---------- ------- ----------
Weighted average fair value
of options granted during year $ 96.30 N/A $ 1.75
========== ========== ==========
F-22
The status of stock options outstanding and exercisable under the Plan as of
December 31, 2002 is as follows:
Stock Options Outstanding Stock Options Exercisable
------------------------- -------------------------
Weighted
Weighted Average Weighted
Average Remaining Average
Exercise Number of Exercise Contractual Number of Exercise
Prices Shares Price Life (Years) Shares Price
$1.80 250,000 $1.80 5.00 0 --
------- ----- ---- - ----
250,000 $1.80 5.00 0 $ --
======= =
PRO FORMA FAIR VALUE DISCLOSURES
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 2000, 2001 and 2002, respectively: risk-free
interest rate of 6.03, 5.42, and 3.00 percent, no expected dividend yields,
expected lives of 4.0, 8.0 and 5.0 years, and expected volatility of 107, 107
and 192 percent, respectively. Fair value computations are highly sensitive to
the volatility factor assumed; the greater the volatility, the higher the
computed fair value of options granted.
Had compensation cost for options granted been determined based upon fair value
at the date of the grant, Navidec's net income (loss) would have been the
following pro forma amounts (in thousands, except per share data):
2000 2001 2002
---- ---- ----
Net Income (Loss):
As reported $ 16,354 $ (55,396) $ (3,195)
Net Total stock based employee
Compensation expense determined
Under fair value based method
For all awards, net of related tax effect (1,861) 235 (18)
---------- ---------- ----------
Pro forma $ 14,493 $ (55,161) $ (3,213)
========== ========== ==========
Net Loss per share, basic and diluted
Basic: As Reported $ 26.46 $ (85.68) $ (4.92)
========== ========== ==========
Pro Forma $ 23.40 $ (85.32) $ (4.95)
========== ========== ==========
Diluted: As Reported $ 24.66 $ (85.68) $ (4.92)
========== ========== ==========
Pro Forma $ 21.78 $ (85.32) $ (4.95)
========== ========== ==========
(11) BUSINESS SEGMENT INFORMATION
Navidec has organized its operations around two separate business segments at
the end of 2002 Navidec Capital (which began operations ins 2002) and
eSolutions. In years prior to 2002 the company also had business segments for:
eSolutions, Product Distribution, and DriveOff.com (formerly, "Automotive").
eSolutions provides custom solutions, including the architecture, design,
development and integration of high-tech solutions, utilizing Web technology.
Navidec Capital, focus is on the acquisition of Companys that will provide
positive cash flow, growth opportunities and strong management. Prior to 2002,
Product Distribution provides the resale and configuration of third party
software and hardware components, graphical printers and supplies. Prior to
October 2000, DriveOff.com provided total online
F-23
automotive solutions through its Web sites, in addition to providing custom
solutions to companies in or with relationships in the automotive industry.
Segment operations are measured consistent with the accounting policies used in
these consolidated financial statements.
The following provides information on Navidec's segments:
YEAR ENDED DECEMBER 31, 2000
(in thousands) (f)
Product
e-Solutions DriveOff Distribution Corporate Total
----------- -------- ------------ --------- -----
Revenues from external
customers $ 31,294 $ 713 $ 1,071 $ -- $ 33,078
Gross profit $ 15,469 $ 612 $ (289) $ -- $ 15,792
Loss from operations $ (5,466) $ (14,317) $ (130) $ (7,107)(a) $ (27,020)
Identifiable assets $ 11,108 $ -- $ 335 $ 77,734 (b) $ 89,177
YEAR ENDED DECEMBER 31, 2001
(in thousands) (f)
Product
e-Solutions DriveOff(c) Distribution Corporate Total
----------- ---------- ------------ --------- -----
Revenues from external
customers $ 22,127 $ -- $ 460 $ -- $ 22,587
Gross profit $ 9,412 $ -- $ 28 $ -- 9,440
Loss from operations $ (9,366) $ -- $ (182) $ (9,372)(a) $ (18,920)
Identifiable assets $ 2,453 $ -- $ -- (d) $ 8,159 (b) $ 10,612
YEAR ENDED DECEMBER 31, 2002
(in thousands) (c,e)
Navidec
e-Solutions Capital (f) Corporate Total
----------- ----------- --------- -----
Revenues from external
customers $ 5,120 $ -- $ -- $ 5,120
Gross profit $ 2,274 $ -- $ -- 2,274
Loss from operations $ (872) $ (15) $ (2,018)(a) $ (2,905)
Identifiable assets $ 1,717 $ 35 $ 1,724 (b) $ 3,476
(a) Corporate loss from operations represents restructuring charges, losses on
impairment of assets and restructured receievables, non cash stock expense and
depreciation.
F-24
(b) Corporate assets are those that are not directly identifiable to a
particular segment and can include cash and cash equivalents, investment in debt
securities, restricted cash, property and equipment, prepaids and other assets,
and investments.
(c) Due to the sale of DriveOff.com in 2000 there was no activity in 2001.
(d) All assets associated with Product Distribution were sold or written off in
2001.
(e) Due to Product Distribution being sold or written off in 2001 there was no
activity in 2002.
(f) Navidec Capital was formed in 2002, as such there is no activity prior to
2002.
(12) NOTES RECEIVABLE IN DEFAULT
In March, June, July and August of 2000, the Company funded four Promissory
Notes to Westar Financial, Inc. for $1.2 million, $1 million, $1 million and
$500,000, respectively. The notes carried an interest rate of 9% annually and
are unsecured. The March and June notes were paid in full at the scheduled due
dates of March 31, 2001 and June 5, 2001. The July 2000 note was due on July 5,
2001 and the August 2000 note was due on August 25, 2001; Westar Financial has
not paid these notes. On December 22, 2001 Westar filed for reorganization under
Chapter 11. Accrued interest on the two remaining notes receivable of $1,500,000
was $161,000. In December, 2001 the Company wrote off the balance of the Note
and accrued interest and has included the charge in other (expense) income in
the accompanying consolidated statement of operations. The Company is pursuing
recovery on these notes through the bankruptcy court.
(13) INVESTMENTS
DRIVEOFF.COM
On June 30, 2000, WFC converted its promissory note for 4,307,645 shares of
DriveOff.com. Prior to the conversion, Navidec owned 100% of the outstanding
shares, and subsequent to the conversion, Navidec owned 74.8% of the outstanding
shares.
The Company recognizes gains and losses from the sale or issuance of stock by
its subsidiaries and equity method investees in its statements of operations.
The increase in the Company's proportionate share of DriveOff.com's net assets
as a result of these transactions resulted in a pretax gain for the Company of
$18.3 million. Because DriveOff.com issued 1,107,645 additional shares to WFC as
an incentive to convert the outstanding note, a charge of $5,195,000 was
recorded in connection with the conversion.
On September 30, 2000, the Company sold 100% of its remaining interest in
DriveOff.com for 13,308,300 shares, or an 8.38% interest in CarPoint Inc. The
sale of DriveOff.com resulted in a pretax gain of $43.3 million. The investment
in CarPoint is accounted for under the cost method and the results of
DriveOff.com are no longer included in the Company's statement of operations.
As part of its sale of DriveOff.com, the Company also disposed of its investment
in IADMA. IADMA was included in other investments at December 31, 1999, at its
carrying amount of $390,000.
F-25
CAR POINT, INC.
In March 2001, Navidec concluded there had been an other than temporary
impairment in its CarPoint investment and wrote-down its shares to their
estimated fair value of $0.63 per share. This write-down resulted in a charge of
approximately $43.5 million in the quarter ended March 31, 2001.
In May 2001, Navidec sold 12,258,300 shares of CarPoint, Inc. for net proceeds
of $6.9 million. The sale of the stock resulted in a recognized loss on sale of
the investment of $858,000. In connection with the sale, the Company's Board of
Directors authorized the payment of a bonus of approximately $513,000. The
remaining shares where written-down to $0.56 per share, the price received for
the shares sold. This resulted in a charge of $49,000 for the second quarter
ended June 30, 2001. As of December 31, 2001, the Company held 1,050,000 shares
valued at $588,000. These shares were sold on March 31, 2002 to one of the
majority shareholders at CarPoint.
The net results of the above transactions have been included in impairment of
investments of $44.9 million in the accompanying consolidated statements of
operations.
AVIS
In February of 2000, Navidec entered into a joint venture with Avis Europe for
the development of an online automotive sales enterprise called
YourAutoChoice.com. During 2000, Navidec invested approximately $2.3 million
dollars into the joint venture, and had a further obligation to invest $700,000,
which was accrued at December 31, 2000.
The Company and Avis Group decided to cease operations of the venture in early
2001. As a result, the Company impaired its investment in and advances to the
venture, and it accrued $700,000 for its share of the obligatory capital call in
February 2001. Included in impairments of investments in the accompanying
consolidated statement of operations for the year ended December 31, 2000, is
approximately $3 million related to the venture.
MARKETABLE SECURITIES
In 2001, Navidec sold BEA Systems, Inc. ("BEA") stock with a basis of $673,000
for $881,000, realizing a gain of $208,000. In 2002 the Company sold
approximately 1,100 remaining shares of BEA with a basis of $29,000 for $12,000
and realized a loss of approximately $17,000.
(14) RESTRUCTURING AND OTHER RELATED CHARGES
During 2001, Navidec recorded restructuring and other related impairment charges
of $5,756,000 for headcount reductions and losses related to cancellation and
renegotiation of operating leases. These headcount reductions and lease changes
were taken to align Navidec's cost structure with changing market conditions and
to create a more flexible and efficient organization. The plan resulted in a
headcount reduction of approximately 200 employees, which was comprised 45% of
non-billable staff and 55% of billable staff.
The Company paid $3,504,000 and has accrued $446,000 for employees terminated
during 2001. The remaining restructuring charges of $492,000 consists primarily
of exit costs associated with the
F-26
Company's termination of its lease for a portion of its office space, which is
no longer needed due to the reduced headcount.
During 2001, the Company took an impairment charge of $182,000 to write-down
leased workstations to their estimated fair value of $75,000. Fair value was
determined based upon current negotiations to sell the workstations. An
impairment of $1,057,000 was recorded for leasehold abandonments in connection
with the termination of a portion of the Company's office lease and other assets
were written down $75,000 to their net realizable value.
The following table summarizes restructuring and other related charges recorded
during, the year, including the remaining accrual balance at December 31, 2002
(in thousands):
Asset Remaining
Expensed Write-Downs Payments Balance
-------- ----------- -------- ---------
Severance & benefits $ 3,950 -- $ 3,950 $ --
Contract exit costs 492 -- 442 50
-------- -------- -------- --------
Total restructuring $ 4,442 -- $ 4,392 $ 50
Total impairments $ 1,314 $ 1,314 -- --
(15) REDUCTION OF DEBT
In May 2001, the Company came to an agreement with an unsecured creditor to
settle its note payable with a carrying amount of $793,000 for $250,000 and
monthly payments through December 2001 of $13,333. The settlement resulted in an
extraordinary gain of $450,000.
(16) QUARTERLY RESULTS (Unaudited)
2000
Q1 Q2 Q3 Q4 TOTAL
-- -- -- -- -----
NET SALES $ 6,557 $ 7,648 $ 8,641 $ 10,232 $ 33,078
GROSS MARGIN 3,172 3,786 4,367 4,467(c) 15,792
NET INCOME (LOSS) (6,138) 5,676(a) 26,859(b) (10,043)(d) 16,354
EPS - BASIC (10.08) 9.36 43.92 (15.48) 26.46
DILUTED (10.08) 8.82 39.42 (15.48) 24.48
2001
Q1 Q2 Q3 Q4 TOTAL
-- -- -- -- -----
NET SALES $ 8,608 $ 4,543 $ 5,579 $ 3,857 $ 22,587
GROSS MARGIN 3,644 2,231 2,841 724 9,440
NET LOSS BEFORE
EXTRAORDINARY
ITEM (39,892) (7,934) (4,510) (3,510) (55,846)
NET LOSS (39,892)(e) (7,484)(f) (4,510)(f) (3,510)(f) (55,396)
EPS - BASIC (61.74) (11.52) (7.02) (5.40) (85.68)
DILUTED (61.74) (11.52) (7.02) (5.40) (85.68)
F-27
2002
Q1 Q2 Q3 Q4 (g) TOTAL
-- -- -- ------ -----
NET SALES $ 2,394 $ 1,400 $ 756 $ 570 $ 5,120
GROSS MARGIN 939 564 439 332 2,274
NET LOSS (582) (770) (656) (1,187) (3,195)
EPS - BASIC (.90) (1.26) (1.08) (1.82) (4.92)
DILUTED (.90) (1.26) (1.08) (1.82) (4.92)
(a) In the second quarter of 2000, Navidec recognized a pretax gain of $18.3
million from the partial sale of its DriveOff.com subsidiary. The gain was
partially offset by the issuance of $5.2 million in DriveOff.com common stock as
an incentive to convert the outstanding debt into equity.
(b) In the third quarter of 2000, Navidec sold its remaining interest in
DriveOff.com for 13.3 million shares of CarPoint resulting in a pretax gain of
$43.3 million, and impaired its investment in MBTI and a portion of its
investment in JourneyLink.
(c) In the fourth quarter of 2000, the Company accepted equity in lieu of an
outstanding receivable which was eventually written off resulting in a charge of
$4 million
(d) In the fourth quarter of 2000, Navidec wrote down equity investments in
JourneyLink and Avis to their net realizable value. This resulted in a charge of
$5.3 million.
(e) During the first quarter of 2001, the Company wrote down its investment in
CarPoint by $43.5 million.
(f) In the second, third and fourth quarters of 2001 Navidec reduced its
operating expenses through headcount reductions.
(g) During the forth quarter of 2002, the Company wrote down its inventory by
$64,000 and increased its reserve for doubtful accounts by $158,000.
(17) RIGHTS OFFERING
The Company's board of directors and shareholders have approved a Rights
Offering for all shareholders of record on November 15, 2002, to purchase one
share of voting common stock for each share they own, at a purchase price of
$1.80 per share. (All numbers take into consideration the one share for 18 share
(1 for 18) reverse split effected as of December 5, 2002). On January 21, 2003,
The Company's board of directors amended the Series I 5% Convertible Debenture
terms to include in the Rights Offering all debenture holders of record on
November 15, 2002, who convert their debentures to common stock prior to the
termination date of the Rights Offering. The Rights Offering will commence on
the date they are approved for trading. The Rights will be represented by
Subscription Certificates and will trade on the OTC Bulletin Board. The Rights
automatically expire 30 days after they are approved for trading unless the
Company elects to extend the offering for up to an additional 30 days.
F-28
(18) SUBSEQUENT EVENTS
During December of 2002 Navidec announced that it had entered into preliminary
negotiations to acquire inSolutions, Inc. of Atlanta, Georgia. During January of
2003, Navidec Capital, a whole owned subsidiary of Navidec, Inc. started to
acquire non-technology based companies entered into preliminary negotiations to
acquire Financial Visions, Inc. of Denver, Colorado.
In January 2003 we agreed to issue an option to purchase up to 16 million shares
of the no par value common stock of Navidec Capital, Inc. to Interactive
Capital, Inc., whose primary shareholder is John McKowen, and officer, director
and shareholder of the Company, for a period of five years. The exercise price
may be paid by exchanging common shares of Navidec for the common shares of
Navidec Capital at a ratio of one share of Navidec for each 172.8 shares of
Navidec Capital. Assuming a full exercise of this option, Interactive Capital
would have to deliver a total of 92,593 Navidec shares.
F-29
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On May 1, 2002, NAVIDEC, Inc. (the "Company") engaged Hein + Associates LLP to
replace Arthur Andersen LLP as the Company's independent accountant to audit the
Company's financial statements for the year ended December 31, 2002. Arthur
Andersen LLP was dismissed as the Company's independent accountant on the same
date. The Audit Committee of the Company's Board of Directors approved the
change in the Company's independent accountant.
The independent auditor's report of Arthur Andersen LLP dated April 3, 2002 for
the Company's financial statements for the year ended December 31, 2001 did not
contain an adverse opinion or a disclaimer of opinion, and was not modified as
to audit scope or accounting principles. However, the report did contain an
explanatory fourth paragraph related to the uncertainty about Navidec's ability
to continue as a going concern.
During the Company's three most recent fiscal years and through the date of the
dismissal of Arthur Andersen LLP, the Company did not have any disagreements
with Arthur Andersen LLP.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table shows the name, age and position of each officer and
director of Navidec.
Name Age Position
---- --- --------
J. Ralph Armijo 51 President, Chief Executive Officer and Director
Patrick R. Mawhinney 39 Chief Financial Officer, Treasurer, Secretary and Director
Gerald A. Marroney 50 Director
John R. McKowen 52 Director
Louis F. Coppage 65 Director
John McGrain 57 Director
Our officers are elected by the board of directors at the first meeting after
each annual meeting of our shareholders and hold office until their successors
are duly elected and qualified under our bylaws.
J. RALPH ARMIJO has served as our President, Chief Executive Officer and as one
of our directors since our inception in 1993. From June 1999 until October 2000,
Mr. Armijo served as the Chairman of the Board of DriveOff.com, Inc. From 1981
to 1993, Mr. Armijo was employed by Tektronix, Inc., a communications company
which also produces testing and measuring equipment, most recently as its
Western Regional Manager. From 1976 to 1981, Mr. Armijo was employed by IBM
Corporation, where he sold computerized accounting and financial applications to
small and medium-sized businesses. Mr. Armijo received his B.A. from Colorado
College and his M.B.A. from the University of California, Los Angeles.
PATRICK R. MAWHINNEY has served as our Chief Financial Officer, Treasurer and as
a director since July 1996. Mr. Mawhinney served as our Secretary from August
1999 until July 2001 and from January 2002 to present. Prior to that he served
as the President of Interactive Planet, Inc. from its inception in May
1995 until its merger with the Company in July 1996. From May 1995 until May
1996, Mr. Mawhinney also served as a financial/accounting consultant for
MIS/Sunguard, a provider of accounting and investment software. Mr. Mawhinney
was employed as an Assistant Vice President of The Bank of Cherry Creek from
November 1993 to May 1995. He received his B.S. from Colorado State University.
GERALD A. MARRONEY has served as a director since April 1997. He has served as
the Judicial Administrator for the State of Colorado since 2001. Prior to which
he served as a State of Colorado District Court Judge in Pueblo County, Colorado
from 1990-2001. Before that time he was a practicing attorney in Pueblo,
Colorado. Mr. Marroney received his B.S. from Southern Colorado State College
and his J.D. from Oklahoma City University.
JOHN R. MCKOWEN is a newly elected director of the Company. Mr. McKowen was
hired by the Company as a financial consultant in 1996 and was instrumental in
the private, public, and secondary financing of the Company. He served as a
financial consultant to the Company until March 2002. Mr. McKowen began his
career in the financial services industry by joining Merrill Lynch in 1978. In
1980 he joined Dean Witter Reynolds. In 1984 Mr. McKowen began working as an
independent consultant and has worked in that capacity for the last eighteen
years. Mr. McKowen received a B.A. in economics from Metropolitan State College.
LOUIS F. COPPAGE is a newly elected director of the Company. Mr. Coppage is an
Investment Banking Consultant and Merger and Acquisition Specialist for emerging
public companies. He has over twenty years of executive and managerial
experience with both domestic and international operations involving finance and
business development for both private and public corporations. Since 1986, he
has served as a financial consultant for numerous clients in the emphasis on the
capital formation process for corporate clients including Sybersay
Communications of Walnut Creek, California, Universal Management Inc. of Denver,
Colorado, Alliance Medical Corporation of Phoenix, Arizona, Citadel
Environmental Group of Denver, Colorado, SAN Holding, Inc. of Castle Rock,
Colorado, and TangibleData Inc. of Boulder, Colorado.
From 1978 to 1986, Mr. Coppage was Founder and Principal of American Energy
Investments, Inc. of Denver, Colorado. From 1969 to 1979, he was President of
Foresee, Ltd., an energy development company, and of Coppage & Associates, a
financial planning company in Denver, Colorado. Mr. Coppage studied business at
the University of Maryland and Emporia State College before beginning his career
at Connecticut General Life Insurance Company in 1964, where he was recognized
for his achievements in publications such as times, Newsweek and U.S. World
Report. He was a founding member of nationally recognized insurance and
financial planning groups, Top of the Table and The Forum.
Mr. Coppage is the former Chairman of SAN Holdings, Inc., a $30M data storage
business based in Castle Rock, Colorado. He is a past officer and director of
several Colorado-based emerging public companies engaged in staffing services,
information technology, and other industries.
JOHN McGRAIN is a newly elected director of the Company. Since 2000, Mr. McGrain
has been the Chairman of Enterra Energy Corp. (Nasdaq: EENC). From 1997 to 2000,
he was with Financial Pacific Softworks and assisted them in going public. From
1994 to 1997, Mr. McGrain was a private investor and consultant to a number of
emerging growth companies. From 1984 to 1994, Mr. McGrain was Chairman and CEO
of Conversion Industries, a merchant bank located in California. Mr. McGrain was
responsible for the financing of thirteen public companies and numerous
municipal and corporate bond financings. Mr. McGrain has served on the board of
directors of the following companies: Chairman International Colin Energy,
1989-1993, CVD Financial, 1993-1994, Western Energy Management Corp., 1992-1993,
United
Mercantile Bank, 1986-1987, Alliance Medical Corp., 1996, Beta Well Service,
1990-1993. Mr. McGrain received a BA from UCLA in 1967 and attended Graduate
School at USC in 1998. None of the Company's directors or nominees are related
to any other director or executive officer.
Section 16(a) Beneficial Ownership Reporting Compliance
Under U.S. securities laws, directors, certain executive officers and persons
holding more than ten percent (10%) of the Company's common stock must report
their initial ownership of the common stock and changes in that ownership to the
SEC. The SEC has designated specific due dates for those reports and the Company
must identify in this report those persons who did not file these reports when
due. Based solely on the Company's review of copies of the reports filed with
the SEC in the most recent fiscal year and written representations of its
directors and executive officers:
Except as set forth above, Navidec believes that its current officers and
directors are in compliance with Section 16(a).
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the annual compensation paid to Navidec's Chief
Executive Officer and other executive officers of Navidec, for the last three
fiscal years.
Annual Compensation Long Term Compensation
---------------------------------- -----------------------------------------------
Name and Restricted Securities All Other
Principal Annual Compen- Stock Underlying LTIP Compen-
Position Year Salary Bonus sations Awards Options/SARs(#) Payouts sations
- -----------------------------------------------------------------------------------------------------------
Ralph 2002 $170,000 $ 0 $ 0 $ 0 0 $ 0 $ 0
Armijo, 2001 $207,000 $ 0 $ 0 $ 0 197,000(1) $ 0 $ 0
CEO 2000 $288,000 $125,000 $ 0 $ 0 0 $ 0 $ 0
Pat 2002 $103,000 $ 0 $ 0 $ 0 0 $ 0 $ 0
Mawhinney 2001 $126,000 $ 0 $ 0 $ 0 71,000(2) $ 0 $ 0
CFO 2000 $167,000 $100,000 $ 0 $ 0 0 $ 0 $ 0
(1) The number indicated represents the number of shares of common stock
underlying stock options granted to Mr. Armijo during 2001.
(2) The number indicated represent the number of shares of common stock
underlying stock options granted to Mr. Mawhinney during 2001.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning individual grants of stock
options made during the year ended December 31, 2002 to Navidec's Chief
Executive Officer and the other named executive officers. Navidec has issued no
stock appreciation rights.
Number of % of
Securities Total Options Closing
Underlying Granted to Price as of
Options/SARs Employees in Dec 31, Exercise or Base Expiration Grant Date
Name Granted Fiscal Year 2001 Price ($/Sh) Date Present Value
---- ------------ ------------- ----------- ---------------- ---------- -------------
John McKowen 250,000 100% $2.26 $1.80 11/2007 $437,000(1)
(1) Based on the value according to Black Scholes
AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
The following table sets forth information concerning each exercise of stock
options during the year ended December 31, 2001 by Navidec's Chief Executive
Officer and the other named executive officers, and the fiscal year-end value of
unexercised options held by him.
Number of
Securities Value of
Underlying Unexercised In-the-Money
Options/SARs Options/SARs
Shares at FY-End (#) at FY-End ($)
Acquired Value Exercisable/ Exercisable/
Name on Exercise(#) Realized Unexercisable Unexercisable(1)
- ------------- -------------- -------- ---------------------- ----------------
Ralph Armijo 0 0 77,000/26,000 $174,000/$59,000
Pat Mawhinney 0 0 30,000/10,000 $ 68,000/$23,000
John McKowen 0 0 0/250,000 $ 0/115,000
(1) The value indicated was calculated by determining the difference between the
fair market value of Navidec's common stock underlying the stock options on
December 31, 2002 and the exercise price of those options.
DIRECTOR COMPENSATION
None of Navidec's directors received any compensation during the most recent
fiscal year for serving in their position as a director. Non-employee members of
the Board of Directors received options to purchase 10,000 shares of common
stock issued under Navidec's stock option plan.
EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
Navidec entered into an Employment Agreement with Mr. Armijo effective March 9,
2000. The term of that agreement is for two years and it renews automatically
for successive additional one-year periods provided that neither Mr. Armijo nor
Navidec provide the other with notice of their intent not to renew the agreement
at least thirty days before the anniversary date of the agreement. Mr. Armijo's
current annual salary under the agreement is $285,000 and his salary is reviewed
annually. The agreement also provides that Mr. Armijo will be paid an annual
bonus. In the event that Mr. Armijo's employment were to be terminated without
"Cause" by Navidec, as defined in the agreement, then Navidec must pay Mr.
Armijo severance payments (the "Severance Payments"). The Severance Payments
will be equal to two times Mr. Armijo's then effective annual salary, plus two
times the annual bonus paid or payable for the most recently completed fiscal
year during the term of the agreement, plus the continuation of all of
"Benefits" that Mr. Armijo is entitled to under Company plans, as defined in the
agreement, for two years and the immediate vesting of all of Mr. Armijo's
non-vested options for shares of Navidec's capital stock. If Mr. Armijo's
employment were terminated without Cause, including termination due to a change
in control, as of March 15, 2003, Mr. Armijo would receive $570,000.
Navidec entered an Employment Agreement with Mr. Mawhinney effective March 9,
2000. The term of that agreement is for two years and it renews automatically
for successive additional one-year periods provided that neither Mr. Mawhinney
nor Navidec provide the other with notice of their intent not to renew the
agreement at least thirty days before the anniversary date of the agreement. Mr.
Mawhinney's current annual salary under the agreement is $170,000 and his salary
is reviewed annually. The agreement also provides that Mr. Mawhinney will be
paid an annual bonus. In the event that Mr. Mawhinney's employment were to be
terminated without "Cause" by Navidec, as defined in the agreement, then Navidec
must pay Mr. Mawhinney severance payments (the "Severance Payments"). The
Severance Payments will be equal to two times Mr. Mawhinney's then effective
annual salary, plus two times the annual bonus paid or payable for the most
recently completed fiscal year during the term of the agreement, plus the
continuation of all of "Benefits" that Mr. Mawhinney is entitled to under
Company plans, as defined in the agreement, for two years and the immediate
vesting of all of Mr. Mawhinney's non-vested options for shares of Navidec's
capital stock. If Mr. Mawhinney's employment were terminated without Cause,
including termination due to a change in control, as of March 15, 2003, Mr.
Mawhinney would receive $340,000.
Navidec entered an Employment Agreement with Mr. McKowen effective January 30,
2003. The term of that agreement is for two years and it renews automatically
for successive additional one-year periods provided that neither Mr. McKowen nor
Navidec provide the other with notice of their intent not to renew the agreement
at least thirty days before the anniversary date of the agreement. Mr. McKowen's
current annual salary under the agreement is $60,000 and his salary is reviewed
annually. The agreement also provides that Mr. McKowen will be paid an annual
bonus. In the event that Mr. McKowen's employment were to be terminated without
"Cause" by Navidec, as defined in the agreement, then Navidec must pay Mr.
McKowen severance payments (the "Severance Payments"). The Severance Payments
will be equal to two times Mr. McKownes's then effective annual salary, plus two
times the annual bonus paid or payable for the most recently completed fiscal
year during the term of the agreement, plus the continuation of all of
"Benefits" that Mr. McKowen is entitled to under Company plans, as defined in
the agreement, for two years and the immediate vesting of all of Mr. McKowen's
non-vested options for shares of Navidec's capital stock. If Mr. McKowen's
employment were terminated without Cause, including termination due to a change
in control, as of March 15, 2003, Mr. McKowen would receive $120,000.
In January 2003 we agreed to issue an option to purchase up to 16 million shares
of the no par value common stock of Navidec Capital, Inc. to Interactive
Capital, Inc. for a period of five years. The exercise price may be paid by
exchanging common shares of Navidec for the common shares of Navidec Capital at
a ratio of one share of Navidec for each 172.8 shares of Navidec Capital.
Assuming a full exercise of this option, Interactive Capital would have to
deliver a total of 92,593 Navidec shares, which as of January 27, 2003 had the
approximate value of $224,000. This transaction was not negotiated at arms'
length as John R.
McKowen controls Interactive Capital and is a control person of Navidec as a
director of the Company and President of Navidec Capital. Notwithstanding this,
the board of directors determined that the proposal was fair to all of the
participants including our shareholders.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Patrick Mawhinney, our Chief Financial Officer, served as a member of Navidec's
Compensation Committee For the Fiscal year ended 2002.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of March 15, 2002, concerning the
beneficial ownership of Navidec's common stock by each person who beneficially
owns more than five percent of the common stock; by each of Navidec's executive
officers and directors; and by all executive officers and directors as a group.
Number of
Shares of
Name and Address of Common Stock Percent of
Beneficial Owner(2) Beneficially Owned Beneficial Ownership
- ------------------- ------------------ --------------------
Ralph Armijo 133,183(3) 14.3%
Patrick R. Mawhinney 35,409(3) 3.8%
John McKowen 47,227(3) 5.1%
Gerald A. Marroney 1,667(3) (1)
All directors and executive officers as
a Group (Four Persons) 217,486 23.3%
Wells Fargo & Company
WFC Holding Corp.
420 Montgomery St.
San Francisco, CA 94104 51,916(4)(5) 5.6%
Rule 13d-3 under the Securities Exchange Act of 1934, provides the determination
of beneficial owners of securities. That rule includes as beneficial owners of
securities, any person who directly or indirectly has, or shares, voting power
and/or investment power with respect to such securities. Rule 13d-3 also
includes as a beneficial owner of a security any person who has the right to
acquire beneficial ownership of such security within sixty days through means,
including, the exercise of any option, warrant or conversion of a security. Any
securities not outstanding which are subject to such options, warrants or
conversion privileges are deemed to be outstanding for the purpose of computing
the percentage of outstanding securities of the class owned by such person.
Those securities are not deemed to be outstanding for the purpose of computing
the percentage of the class by any other person.
(1) Less than one percent.
(2) Except as indicated herein, the business address for each person is 6399 S.
Fiddler's Green Circle, Suite 300, Greenwood Village, CO 80111.
(3) The number of shares indicated includes shares of common stock underlying
options that are currently exercisable, as of March 15, 2002 which are held by
the following persons in the amounts indicated: Mr.
Armijo (77,166); Mr. Mawhinney (29,889); Mr. Marroney (1,667); plus shares
underlying debentures currently outstanding to the following persons in the
amounts indicated: Mr. Armijo (22,222) and Mr. McKowen (47,222).
(4) Represents a beneficial owner of more than 5% of the Common Stock based on
the owner's reported ownership of shares of common stock in filings made with
the Securities and Exchange Commission pursuant to Section 13(g) of the
Securities Exchange Act of 1934, as amended. Information with respect to each
beneficial owner is as of the date of the most recent filing by the beneficial
owner with the Securities and Exchange Commission and is based solely on
information contained in such filings.
(5) On October 13, 2000, the shareholders of Navidec approved the issuance on
non-voting common shares. Subsequently, 38,949 non-voting shares were issued to
Wells Fargo upon conversion of a convertible debenture.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In November 2000, Navidec loaned $35,000 to an officer of the Company carrying
an annual interest rate of 7% with principal and interest due on May 30, 2001.
The note and accrued interest was paid off in March of 2001.
During 2000, Navidec retained Benesch, Friedlander, Coplan & Aronoff LLP, of
which firm Navidec's former Executive Vice President -- Business Development,
was a partner during 2000, to perform legal services for the Company. The
Company paid $546,000, $84,000 and $9,000 in fees and expenses to Benesch,
Friedlander, Coplan & Aronoff LLP in 2000, 2001 and 2002, respectively, for the
performance of legal services for the Company.
In January of 2001, the Company funded promissory notes due from management and
shareholders totaling $528,000. These notes carried an interest rate of 5.9%
payable annually. The notes were collateralized by a right to proceeds agreement
that required the payment of the notes upon the sale of the CarPoint, Inc. stock
held by the Company. These notes receivable were settled in conjunction with the
sale of the CarPoint, Inc. stock in May 2001. The receivables were netted
against the amounts otherwise payable to these individuals for their involvement
in the initial sale of DriveOff.com in September 2000, and the sale of CarPoint
stock in May 2001.
During 2001, Navidec sold $52,000 worth of inventory at cost to XCEN28, Inc,
whose primary shareholder is the nephew of Navidec's CEO.
On September 16, 2002, the Company entered into a Debenture Purchase Agreement
with Interactive Capital, Inc. pursuant to which it and other qualified
purchasers may purchase a minimum of $250,000 and a maximum of $5 million in
aggregate principal amount of convertible debentures, whose primary shareholder
is John McKowen a director, officer and shareholder of Navidec, Inc. On October
1, 2002 the Company took down $250,000 of debentures. These debentures were lead
by Interactive Capital and placed with individuals, which included Mr. John
McKowen $85,000 and Mr. Ralph Armijo, President, CEO and Director $40,000.
In January 2003 the Company agreed to issue an option to purchase up to 16
million shares of the no par value common stock of Navidec Capital, Inc. to
Interactive Capital, Inc. for a period of five years, whose
primary shareholder is John McKowen a director, officer and shareholder of the
Company. The exercise price may be paid by exchanging common shares of Navidec
for the common shares of Navidec Capital at a ratio of one share of Navidec for
each 172.8 shares of Navidec Capital. Assuming a full exercise of this option,
Interactive Capital would have to deliver a total of 92,593 Navidec shares.
Although the foregoing transactions were determined without arm's length
negotiations and involved conflicts of interest between the interests of the
related party and Navidec, Navidec believes that the transactions were entered
into on terms no less favorable to Navidec than could have been obtained from
independent third parties.
ITEM 14 CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
J. Ralph Armijo, who serves as the Company's chief executive officer and Patrick
Mawhinney, who serves as the Company's chief financial officer, after evaluating
the effectiveness of the Company's disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14(c) as of a date within 90 days of the
filing date of this annual report (the "Evaluation Date") concluded that as of
the Evaluation Date, the Company's disclosure controls and procedures were
adequate and effective to ensure that material information relating to the
Company and its consolidated subsidiaries would be made know to them by
individuals within thos entities, particularly during the period in which this
annual report was being prepared.
(b) Change in internal controls.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect the Company's disclosure controls and
procedures subsequent to the Evaluation Date, nor any significant deficiencies
or material weaknesses in such disclosure controls and procedures requiring
corrective actions. As a result, no corrective actions were taken
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K.
(a)1. Index to Financial Statements Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 2000 and 2001 Consolidated
Statements of Operations for the years ended December 31, 1999, 2000 and 2001
Consolidated Statements of Shareholders' Equity for the years ended December 31,
1999, 2000 and 2001 Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 2000 and 2001 Notes to Consolidated Financial Statements
3.1 Second Amended and Restated Articles of Incorporation of Navidec, Inc. (3)
3.2 Amended and Restated Bylaws of ACI Systems, Inc.(1)
3.3 Articles of Merger and Agreement and Plan of Merger Between ACI Systems,
Inc. and Interactive Planet, Inc.(1)
4.1 Form of Certificate for Common Stock of Navidec.(1)
10.1 Navidec's Stock Option Plan.(2)
10.2 Form of Confidentiality and Non-Disclosure Agreement between Navidec
and its significant technical employees.(1)
10.3 Employment Agreement between Navidec and Ralph Armijo dated March 9,
2000.(3)
10.6 Stock and Note Purchase Agreement dated as of July 23, 1999 by and
between the Company and WFC Holdings Corporation.(5)
10.7 Form of Note of the Company payable to the order of WFC Holdings
Corporation.(5)
10.8 Form of Registration Rights Agreement by and between the Company and WFC
Holdings Corporation.(5)
10.9 John R. McKowen Employement Agreement
10.10 Interactive Capital Rights Agreement
23.1 Consent of Hein + Associates LLP. Filed herewith.
(1) Incorporated by reference from the like numbered exhibit to Navidec's
Registration Statement on Form SB-2 declared effective February 10, 1997
(SEC File Number 333-14497).
(2) Incorporated by reference from Navidec's Preliminary 14/A filed May 13,
1998.
(3) Incorporated by reference from the like numbered exhibit to Navidec's
Annual Report on Form 10-K for the year ended December 31, 2000.
(4) Incorporated by reference from Navidec's Annual Report on Form 10-KSB for
the year ended December 31, 1998.
(5) Incorporated by reference from Navidec's Form 8-K filed July 29, 1999.
(b) Reports on Form 8-K
None
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
NAVIDEC, INC.
Dated: March 15, 2003 By: /s/ J. Ralph Armijo
------------------------
J. Ralph Armijo
President, Chief Executive Officer and
Director
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. This report may be signed in
multiple identical counterparts all of which, taken together, shall constitute a
single document.
Dated:March 26, 2003 By: /s/ J. Ralph Armijo
-----------------------
J. Ralph Armijo
President, Chief Executive
Officer and Director
Dated: March 26, 2003 By: /s/ Patrick R. Mawhinney
-----------------------------
Patrick R. Mawhinney
Chief Financial Officer,
Secretary and Director
(Principal financial and
accounting officer)
Dated: March 26, 2003 By: /s/ John McKowen
--------------------
By: John McKowen
President Navidec Capital,
Director
Dated: March 26, 2003 By: /s/ Gerald A. Marroney
--------------------------
By: Gerald A. Marroney
Director
Dated: March 26, 2003 By: /s/ Louis F. Coppage
------------------------
By: Louis F. Coppage
Director
Dated: March 26, 2003 By: /s/ John McGrain
--------------------
By: John McGrain
Director
Certification of the Chief Executive Office and Chief Financial officer of
Navidec, Inc. Pursuant to 18 U.S.C. Section 1350.
We certify that, to the best of our knowledge and belief, the Annual report on
form 10K of Navidec, Inc. for the period ended December 31, 2002:
1) complies with the requirements of Section 13(a) or 15(d) of the Securities
and Exchange act of 1934; and
2) the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of Navidec, Inc.
By /S/ RALPH ARMIJO
Ralph Armijo
President and CEO
Date: March 26, 2003
By /S/ PAT MAWHINNEY
Pat Mawhinney
Chief Financial Officer
Date: March 26, 2003
I, J. Ralph Armijo, Chief Executive Officer of Navidec, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Navidec, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
4. The registrant's other certify officers and I are responsible for
establishing and maintaing disclosure controls and procedures (as determined in
Exchange act Rules 131-14 and 15Q-14) for the registrant and have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made know to us by other within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this report
(the "Evaluation Date") and
c) Presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certify officers and I have disclosed, passed on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors;
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weakness in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certify officers and I have indicated in this
quarterly report whether there where significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 26, 2003
/s/ J. Ralph Armijo
J. Ralph Armijo
Chief Executive Officer
I, Patrick R. Mawhinney, Chief Financial Officer of Navidec, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Navidec, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
4. The registrant's other certify officers and I are responsible for
establishing and maintaing disclosure controls and procedures (as determined in
Exchange act Rules 131-14 and 15Q-14) for the registrant and have:
d) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made know to us by other within those entities, particularly during the
period in which this quarterly report is being prepared;
e) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this report
(the "Evaluation Date") and
f) Presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certify officers and I have disclosed, passed on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors;
c) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weakness in internal controls; and
d) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certify officers and I have indicated in this
quarterly report whether there where significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 26, 2003
/s/ Patrick R. Mawhinney
Patrick R. Mawhinney
Chief Financial Officer