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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, 2003
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 25, 2004 was approximately $2.65
million based on the closing price of the registrant's common stock as reported
at that date. As of March 25, 2004, 2,404,313 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
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NAVIDEC, INC.
FORM 10-K
For the Fiscal Year Ended December 31, 2003
INDEX
Part I
Item 1 Business.........................................................3
Item 2 Properties.......................................................5
Item 3 Legal Proceedings................................................5
Item 4 Submission of Matters to a Vote of Security Holders..............6
Part II
Item 5 Market For Registrant's Common Stock and Related
Stockholder Matters..........................................7
Item 6 Selected Financial Data.........................................7
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................8
Item 7a Quantitative and Qualitative Disclosures about Market Risk.....17
Item 8 Financial Statements and Supplementary Data...................F-1
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosures.....................18
Item 9a Controls and Procedures........................................18
Part III
Item 10 Directors and Executive Officers of the Registrant..............20
Item 11 Executive Compensation..........................................21
Item 12 Security Ownership of Certain Beneficial Owners and Management..24
Item 13 Certain Relationships and Related Transactions..................25
Item 14 Principal Accountant Fees and Services..........................26
Part IV
Item 15 Exhibits, Financial Statement Schedules, and
Reports on Form 8-K.........................................28
2
PART I
Except as otherwise stated, the information contained in this Form 10-K is as of
December 31, 2003, 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
Navidec, Inc. ("Navidec" or "The Company") is organized into three divisions,
Financial Services, Technology, and Mortgage Services. In October of 2002,
Navidec formed a new wholly owned subsidiary Navidec Capital, Inc, which was
renamed Navidec Financial Services, Inc. (`NFS") in August 2003. In August 2003,
Navidec Technology Corporation was formed as a wholly owned subsidiary of
Navidec, Inc. and in October 2003, changed its name to SwiftSure, Inc. On
September 11, 2003, the Company entered into an agreement with Northsight
Mortgage Group, LLC ("Northsight") and its sole member that provided for the
transfer of 80% of the issued and outstanding membership units of Northsight to
Navidec for Navidec common stock.
NAVIDEC'S SERVICES
Financial Services
NFS provides consulting, personnel, and services to emerging growth micro and
small capitalization companies to help them effectively structure transactions
to attract public and private capital. NFS also provides financial public
relations services. Management believes that micro and small cap companies
rarely have the legal, accounting, or marketing resources necessary to
effectively interact with the highly regulated and competitive financial
markets. Navidec provides those resources on a contract basis so the
entrepreneur can focus on growing the business. After evaluating a potential
client for their probability of success and determining the company's growth
strategy and anticipated capital requirements, NFS provides specific
recommendations, personnel, and services to work in concert with the company to
develop and execute financial transactions. NFS receives monthly consulting fees
from its clients as well as billing for time and charges for additional services
provided. In addition, NFS may sometimes invest its own capital in clients with
whom they've contracted. As part of its compensation from clients, NFS may also
receive equity options. Typically NFS seeks clients who are well managed, offer
cash flow and the opportunity for long-term growth.
Mortgage Services
Mortgage Services is focused on providing end to end mortgage services from back
office processing to mortgage banking services. On September 11, 2003, the
Company entered into an agreement with Northsight Mortgage Group, LLC
3
("Northsight") and its sole member that provided for the transfer of 80% of the
issued and outstanding membership units of Northsight to Navidec for Navidec
common stock. Northsight is a Scottsdale, Arizona based mortgage broker engaged
in the business of marketing, arranging and selling of consumer home mortgages.
The Company plans to acquire and integrate companies providing these services.
The company will focus on business opportunities within this industry segment
that offer cash flow, strong management and opportunity for growth.
Technology
In 2003, Navidec Technology provided quality solutions that enabled
organizations to manage secure access to web applications within the enterprise
and across the business value chain. Navidec's suite of proven solutions enable
an enterprise 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 a single entry point to
personalized enterprise resources. Navidec Technology provided consulting and
expert engineering services in Web security and Identity Management in the areas
of Authentication, Access Control, Directory, User Management, and Provisioning.
This was done through the integration and extension of best-of-breed portal,
directory, security and integration software developed by the leading internet
software vendors As a result of declining technology revenues and an inability
to realize a profit from technology business operations, Management believes
that discontinuation of these operations would not have a material impact on
overall future revenues but would provide an avenue for continued reduction in
operating expenses. As such, Navidec may discontinue Navidec Technology
operations in the second quarter of 2004.
NAVIDEC'S STRATEGY
Going forward, Navidec will focus its resources on continuing to develop and
operate its Financial Services and Mortgage Services divisions.
EMPLOYEES
As of December 31, 2003, Navidec had a total of twenty-five (25) employees, of
which one (1) was billable, three (3) were in sales and marketing, two (2) in
Navidec Financial Services, fifteen (15) in Mortgage Services (two (2)
administrative and thirteen (13) loan officers), and four (4) 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.
FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
All of Navidec's revenues are derived from customers within the United States.
All of Navidec's assets are located in the United States.
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
4
and WFC Holdings Corporation were 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.
ITEM 2. PROPERTIES
Navidec's operations are principally located at Fiddler's Green Center, 6399 S.
Fiddler's Green Circle, Greenwood Village, Colorado, in a 6,670 square foot
facility. Navidec's technology and financial services segments utilize this
facility. The lease for this facility renewed for a three-year term in July 2003
and has a current monthly lease rate of approximately $11,000 per month through
June 30, 2006. Navidec's Northsight Mortgage Group LLC subsidiary has offices
located at 14300 N. Northsight Blvd., Scottsdale, Arizona, in an approximately
2,500 square foot facility. The lease for this facility has a current monthly
lease rate of approximately $5,350 per month through October 31, 2004.
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, other than those
described below, that could have a material impact on Navidec's financial
position or results of operations.
In 1999 Navidec purchased a software system and one year of support services
from Oracle Corporation (the "Vendor"). In the transaction, Navidec executed a
payment plan agreement. The Vendor subsequently assigned the payment plan
agreement to CIT Financial USA, Inc. (the "Finance Company"). On September 2,
2002 the Finance Company brought an action in Arapahoe County District Court,
State of Colorado, under the payment plan agreement, alleging that Navidec has
defaulted and owes $242,146 plus interest at 1.5% from October 1, 2002, and
attorneys fees, costs and expenses under the payment plan agreement. As
defenses, Navidec has asserted, among other claims, that it reached an agreement
with the original vendor on January 28, 2002 whereby the Vendor agreed that if
Navidec packaged all unused software and documentation and removed the unused
software from its systems, the return of the software would end all of Navidec's
rights to use the software and would end all payment obligations. In addition,
Navidec has asserted that the Vendor breached its agreement to provide sales and
customers to Navidec. Navidec has asserted counterclaims and third party claims
against the Vendor for promissory estoppel and breach of contract. No formal
discovery has occurred and trial is set for June 17, 2004. There is a risk that
at trial judgment may enter against Navidec for some or all of the amount sought
by the Finance Company plus costs and reasonable attorneys' fees. For this
reason, management is exploring the possibility of settlement in an attempt to
avoid trial.
On October 10, 2003, our former Chief Financial Officer ("CFO") filed a Demand
For Arbitration against the Company relating to sums that the CFO claims are
owing to him from the Company as a result of his employment being terminated. He
seeks to recover $452,508, plus statutory penalties, attorneys' fees, costs
and pre-judgment interest. We have filed counterclaims in the arbitration for
breach of contract, breach of fiduciary duty, and conversion and seek damages of
$1 million to $5 million. These matter are in the very early stages and the
Company intends to defend any claims by the CFO vigorously. Because we are
5
unable to conclude at this time that an unfavorable outcome in this matter is
either "probable" or "remote" (as such terms are defined in the ABA Statement of
Policy), we decline to comment as to the outcome of this matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted during the fourth quarter of the fiscal year
covered by this Report to a vote of stockholders, through the solicitation of
proxies, or otherwise.
6
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. On August 18,
2003 the Company received notice from Nasdaq SmallCap Market that the Company
was not in compliance in accordance with Marketplace Rule 4310(c)(13) which
requires that the company have a minimum $2,500,000 in stockholders' equity. As
a result, Navidec began trading on the OTC Bulletin Board under the symbol NVDC
at the open of business on Wednesday, August 20, 2003.
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, Nasdaq SmallCap Market, and the OTC
Bulletin Board:
Common Stock
Quarter Ended High Low
------------- ---- ---
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
March 31, 2003 $2.550 $1.900
June 30, 2003 $3.100 $1.910
September 30, 2003 $3.200 $1.050
December 31, 2003 $1.260 $1.030
As of March 25, 2004, Navidec had 201 shareholders of record. Additionally,
based on the broker search conducted for our 2002 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.
7
Year Ended, December 31,
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Statement of Operations Data
(In thousands, except per share amounts):
Revenues $ 977 $ 5,120 $ 22,587 $ 33,078 $ 18,966
Loss from operations (4,508) (2,905) (18,920) (27,020) (9,048)
Net income (loss) (4,111) (3,195) (55,396) 16,354 (8,161)
Net loss per share:
Basic $ (3.28) $ (4.92) $ (85.68) 26 (19)
Diluted $ (3.28) $ (4.92) $ (85.68) 26 (19)
Weighted average shares--
Basic 1,253 649 647 620 421
Diluted 1,253 649 647 620 421
Year Ended, December 31,
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Balance Sheet Data (in thousands):
Cash & cash equivalents $ 302 $ 130 $ 2,465 $ 3,475 35,860
Restricted cash -- -- 1,200 2,990 9,855
Working capital (311) 182 1,841 17,328 46,264
Total assets 1,154 3,476 10,612 89,177 65,028
Long-term debt including
current portion 281 455 1,770 2,270 779
Convertible debt -- 250 -- -- 19,876
Total stockholders' equity 39 1,855 4,967 60,567 39,095
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Navidec is organized into three divisions; Financial Services, Mortgage
Services, and Technology.
Financial Services provides consulting, personnel, and services to emerging
growth micro and small capitalization companies to help them effectively
structure transactions to attract public and private capital. NFS also provides
financial public relations services. Management believes that micro and small
cap companies rarely have the legal, accounting, or marketing resources
necessary to effectively interact with the highly regulated and competitive
financial markets. Navidec provides those resources on a contract basis so the
entrepreneur can focus on growing the business. After evaluating a potential
client for their probability of success and determining the company's
anticipated growth strategy and capital requirements, NFS provides specific
recommendations, personnel, and services to work in concert with the company to
develop and execute financial transactions. NFS receives cash flow from its
clients for services provided. In addition, NFS may also invest its own capital
in clients with whom they've contracted. As part of its compensation from
clients, NFS may also receive equity options. Typically NFS seeks clients who
are well managed, offer cash flow and the opportunity for long-term growth.
8
Mortgage Services is focused on providing end to end mortgage services from back
office processing to mortgage banking services. On September 11, 2003, the
Company entered into an agreement with Northsight Mortgage Group, LLC
("Northsight") and its sole member that provided for the transfer of 80% of the
issued and outstanding membership units of Northsight to Navidec for Navidec
common stock. Northsight is a Scottsdale, Arizona based mortgage broker engaged
in the business of marketing, arranging and selling of consumer home mortgages.
The Company plans to acquire and integrate companies providing these services.
In 2003, Navidec Technology provided quality solutions that enabled
organizations to manage secure access to web applications within the enterprise
and across the business value chain. Navidec's suite of proven solutions enable
an enterprise 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 a single entry point to
personalized enterprise resources. Navidec Technology provided consulting and
expert engineering services in Web security and Identity Management in the areas
of Authentication, Access Control, Directory, User Management, and Provisioning.
This was done through the integration and extension of best-of-breed portal,
directory, security and integration software developed by the leading internet
software vendors. During 2003, approximately 27% of Navidec Technology's 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
remaining 73% of revenue was from work done on a time and materials basis.
Revenue for this work is recognized as it is completed. As a result of declining
technology revenues and an inability to realize a profit from technology
business operations, Management believes that discontinuation of these
operations would not have a material impact on overall future revenues but would
provide an avenue for continued reduction in operating expenses. As such,
Navidec may discontinue Navidec Technology operations in the second quarter of
2004.
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 and amortization Additional
operating expenses were incurred in 2003, such as non-cash stock expense 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 re-priced in 2001, employee
stock options issued at below market value in 2003, warrants given to a third
party vendor for marketing services provided during 2001, and the expense
recognized upon amending the convertible debentures to allow participation in
our rights offering in 2003. 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.
9
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 8 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. For fiscal 2003 significant estimates were made
with respect to contingent liabilities that were recorded with regard to certain
pending lawsuite (See Item 3) and with regards to the impairment of inventory
and fixed assets (See Note 7).
Revenue Recognition
We follow very specific and detailed guidelines in measuring revenue, however,
certain judgments affect the application of our revenue policy. In addition, our
revenue recognition determines the timing of certain expenses, such as
commissions. During 2003, approximately 27% 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
73% of revenue during 2003 was from time 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
Our policy on reserves for bad debt determines the timing and recognition of
expenses. We follow guidelines that reserve based off of historical and account
specific trends, however, certain judgments affect the application of our bad
debt reserve policy. 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.
Goodwill and Intangible Assets
Intangible assets are amortized on a straight-line basis over their estimated
useful lives. Goodwill is evaluated annually to determine if its value has been
impaired. On September 11, 2003, the Company entered into an agreement with
Northsight Mortgage Group, LLC ("Northsight") and its sole member that provided
10
for the transfer of 80% of the issued and outstanding membership units of
Northsight to Navidec resulting in the realization of $190,000 of goodwill.
Management has determined that due to the recent time frame of this acquisition
no impairment should be realized for fiscal 2003.
RESULTS OF OPERATIONS (a)
Years ended December 31,
2003 2002 2001
---- ---- ----
REVENUE:
Technology (formerly eSolutions) $ 776 $ 5,120 $ 22,127
Product distribution -- -- 460
Financial Services 5 -- --
Mortgage Services 196 -- --
-------- -------- --------
Total revenue 977 5,120 22,587
COST OF REVENUE 415 2,846 13,147
-------- -------- --------
Gross margin 562 2,274 9,440
OPERATING EXPENSES:
Product development 123 147 4,102
General and administrative 1,845 2,062 7,827
Sales and marketing 359 952 7,059
Depreciation/amortization &
impairment of goodwill 1,872 1,947 3,016
Non cash stock expense 53 71 600
Restructuring charges -- -- 4,442
Loss on impairment of inventory 288 -- --
Loss on impairments of assets 530 -- 1,314
-------- -------- --------
Total operating expenses 5,070 5,179 28,360
-------- -------- --------
LOSS FROM OPERATIONS $ (4,508) $ (2,905) $(18,920)
======== ======== ========
RESULTS OF OPERATIONS AS A PERCENTAGE OF REVENUES
Years ended December 31,
2003 2002 2001
---- ---- ----
REVENUE:
Technology (formerly eSolutions) 79.4% 100.0% 98.0%
Product distribution -- -- 2.0%
Financial Services 0.5% -- --
Mortgage Services 20.1% -- --
----- ----- -----
Total revenue 100.0% 100.0% 100.0%
COST OF REVENUE 42.5% 55.6% 58.2%
----- ----- -----
Gross margin 57.5% 44.4% 41.8%
OPERATING EXPENSES:
Product development 12.6% 2.9% 18.2%
General and administrative 188.8% 40.3% 34.7%
Sales and marketing 36.7% 18.6% 31.3%
Depreciation/amortization
& impairment of goodwill 191.6% 38.0% 13.4%
Non-cash stock expense 5.4% 1.4% 2.7%
Restructuring charges -- -- 19.7%
Loss on impairments of inventory 29.5% -- --
Loss on impairments of assets 54.2% -- 5.8%
----- ----- -----
Total operating expenses 518.9% 101.2% 125.8%
LOSS FROM OPERATIONS (461.4%) (56.8%) (84.0%)
11
YEARS ENDED DECEMBER 31, 2003 AND 2002
Revenues for 2003 were $977,000, a decrease of $4.1 million, or 80.9%, from 2002
revenues of $5.1 million. The decrease was primarily a result of lower market
demand for IT services and an overall downturn in the economy.
Gross margin decreased $1.7 million, or 75.3%, from a gross margin of $2.3
million in 2002 to $562,000 in 2003. As a percentage of revenue, gross profit
increased from 44.4% to 57.5%. The decrease in total dollars was a result of
decreased revenues. The percentage increase was caused as a result of the
product mix in eSolutions.
Product development costs decreased $24,000, or 16.3%, from $147,000 in 2002 to
$123,000 in 2003. As a percentage of revenue, product development costs
increased from 2.9% in 2002 to 12.6% in 2003. The decrease in total dollars is
the result of a decreased focus on new eSolutions product development. The
percentage increase was caused as a result of overall lower revenues.
General and administrative expenses decreased $217,000 or 10.9%, from general
and administrative expenses of $2.0 million in 2002 to $1.8 million in 2003 due
to reductions in personnel and associated overhead expenses. As a percentage of
revenue, general and administrative expenses increased from 39.3% in 2002 to
188.8% in 2003.
Sales and marketing expenses decreased $593,000, or 62.3%, from $952,000 in 2002
to $359,000 in 2003. As a percentage of revenue, sales and marketing expenses
increased from 18.6% to 36.7% of revenue in 2002 and 2003, respectively. The
decreased spending was primarily due to decreased marketing activities and the
closing of remote sales offices.
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. In 2003, the Company also
issued options to certain employees with an exercise price below market. The
Company recorded a non-cash compensation expense of $70,000 related to these
options. At December 31, 2003 approximately $4,000 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:
2003
----
(In Thousands)
Cost of revenue $ 23
Sales and marketing 55
General and administrative 26
----
Total non-cash stock expense $104
====
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Depreciation and amortization decreased approximately $75,000 or 3.8% from $1.95
million in 2002 to $1.88 million in 2003. Depreciation was down in part due to
asset impairments and due to more assets becoming fully depreciated. In 2003 the
Company recorded a loss of $530,000 due to impairments of fixed assets.
Interest income decreased from $32,000 in 2002 to $114 in 2003. This decrease
was the result of lower cash and investment balances in 2003.
Interest expense decreased $171,000 or 78% from $219,000 in 2002 to $48,000 in
2003.
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 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.
During parts of 2003, the Company had excess cash available to it, not
immediately required for operations. Since money market and other yields on
short-term investments were nearly zero, management elected to open a managed,
discretionary trading account to invest approximately $200,000 of its excess
cash in an attempt to improve yields. The investment style utilized by the
account manager involved short-term investments and rapid turnover periodically
utilizing margin in order to take advantage of trends recognized by the manager.
During the year ended December 31, 2003, total purchases of marketable
securities in the Company's account were $20,992,000 and total sales of
marketable securities in the account were $21,041,000 resulting in short term
capital gains totaling $56,000 during that period.
During 2003, Navidec settled its lawsuit against a vendor for $350,000 that was
pending in the United States District Court for the District of Colorado. This
amount was netted against current year legal fees of approximately $47,000,
$8,000 of outstanding accounts payable balances, and a previously recorded
receivable of $70,000, resulting in a gain of $225,000, which is shown as a Gain
on Legal Settlement on our statement of operations. The terms and conditions of
the settlement are confidential.
The Company's deferred tax assets, including approximately $45 million in net
operating loss carryforwards are fully reserved because their realization is not
certain and utilization is limited as a result of changes in ownership in the
Company.
During 2003, the Company realized a loss of $288,000 on the impairment of
inventory. This was due to the write off of third party software applications
that had been held in inventory as part of the Company's product distribution
segment. The Company had been in discussions with a potential buyer in 2003 but
the sales effort was unsuccessful and no other market was found.
As a result of the items discussed above, we recorded a net loss of $4.1 million
in 2003 versus net loss of $3.2 million in 2002. Our basic and diluted loss per
share was $3.28 in 2003 versus a loss per share of $4.84 in 2002.
YEARS ENDED DECEMBER 31, 2002 AND 2001
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 2003, and an overall downturn in the economy. Revenue in 2002
13
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.
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.
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.
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
2001 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.
14
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.
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 in 2001.
LIQUIDITY AND CAPITAL RESOURCES
From our inception through December 31, 2003, we have 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, 2003, we had cash and cash equivalents of $302,000 and a
working capital deficit of $311,000. This compares with cash and cash
equivalents of $130,000 and working capital of $182,000 as of December 31, 2002.
Cash used in our operating activities totaled $1.4 million for the year ended
December 31, 2003. A decrease of approximately $400,000 or 22.2% when compared
with $1.8 million for the year ended December 31, 2002. The decrease in cash
used in operating activities for the year ended December 31, 2003 was primarily
the result of cost savings realized through the restructuring of our operations.
Cash provided by investing activities total approximately $140,000 for the year
ended December 31, 2003 compared with $581,000 for the year ended December 31,
2002. Cash provided by investing activities for year ended December 31, 2003 was
primarily provided by the sale of equipment and marketable
15
securities for $124,000 and $22,000 of cash acquired through an acquisition.
Cash provided by investing activities in 2002 consisted primarily of sales of
investments for approximately $600,000.
Cash provided by financing activities was $1.4 million during the year ended
December 31, 2003. Cash used in financing activities was $1.1 million during the
year ended December 31, 2002. The cash provided by financing activities for year
ended December 31, 2003 was primarily the proceeds from the sale of common stock
and warrants, less payments on our notes and leases payable. 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.
The Company has implemented a plan of action in order to sustain operations and
satisfy the financial covenants on its credit facilities. During 2003 and 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 ongoing business will sustain
operations until the end of 2004.
At December 31, 2003, the Company had a working capital deficit of approximately
$311,000. The Company had a net loss of $4,111,000, $3,195,000, ad $55,396,000
for the years ended December 31, 2003, 2002, and 2001 respectively.
Additionally, the Company may discontinue its Navidec Technology operations in
the second quarter of 2004, and focus on services for which it has a limited
operating history. These factors indicate a substantial doubt that the Company
will be able to continue operations as a going concern, which contemplates the
realization of assets and liquidation of liabilities in the normal course of
business. The financial statements do not include any adjustments that might be
necessary should the Company be unable to continue operations.
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 $101 $101 $-- $ --
Capital leases 180 180 -- --
Operating leases 396 191 205 --
---- ---- ---- --------
Total contractual cash obligations $677 $472 $205 $ --
==== ==== ==== ========
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics
of Both Liabilities and Equity, was issued in May 2003 and requires issuers to
classify as liabilities (or assets in some circumstances) three classes of
freestanding financial instruments that embody obligations for the issuer. SFAS
No. 150 is effective for financial instruments entered into or modified after
May 31, 2003 and is otherwise effective at the beginning of the first interim
16
period beginning after June 15, 2003. Management believes the adoption of SFAS
No. 150 had no material impact on its financial position or results of
operations.
The FASB issued Interpretation ("FIN") No.45, Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others in November 2002 and FIN No. 46 Consolidation of variable
Interest Entries, in January 2003, FIN No. 45 is applicable on a prospective
basis for initial recognition and measurement provisions to guarantees issued
after December 2002, however, disclosure requirements are effective immediately.
FIN No. 45 requires a guarantor to recognize, at the inception of a guarantee, a
liability for the fair value of the obligations undertaken in issuing the
guarantee and expands the required disclosures to be made by the guarantor about
its obligation under certain guarantees that it has issued. The adoption of FIN
No. 45 did not have a material impact on the Companies financial position or
results of operations. FIN No. 46 requires that a company that controls another
entity through interest other than voting interest should consolidate such
controlled entity in all cases for interim periods beginning after June 15,
2003. The adoption of FIN No. 46 had no material impact on its financial
position or results of operations.
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, 2003, 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.
17
Item 8. FINANCIAL STATEMENTS.
NAVIDEC, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors Report F-2
Consolidated Balance Sheets as of December 31, 2003 and 2002 F-4
Consolidated Statements of Operations for the Years Ended
December 31, 2003, 2002 and 2001 F-5
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 2003, 2002 and 2001 F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2003, 2002 and 2001 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 sheets of Navidec, Inc.
and subsidiaries (the "Company") as of December 31, 2003 and 2002, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years 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 audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the 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, 2003 and 2002, and the results of their
operations and their cash flows for the years 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 2003,
2002, and 2001 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
March 13, 2004
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,
ASSETS 2003 2002
---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 302 $ 130
Marketable securities 110 --
Related party investments 206 --
Accounts receivable, net 107 439
Inventory -- 288
Prepaid expenses 65 648
Other current assets 1 48
-------- --------
Total current assets 791 1,553
PROPERTY, EQUIPMENT AND SOFTWARE, net 169 1,922
OTHER ASSETS:
Other assets 5 1
Acquired goodwill 189 --
-------- --------
TOTAL ASSETS $ 1,154 $ 3,476
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 478 $ 670
Accrued liabilities 343 138
Current borrowings and capital leases 281 455
Deferred revenue -- 108
-------- --------
Total current liabilities 1,102 1,371
NON-CURRENT LIABILITIES:
Convertible Debentures -- 250
COMMITMENTS AND CONTINGENCIES (Notes 5, 7, 20)
MINORITY INTEREST 13 --
STOCKHOLDERS' EQUITY:
Common stock, no par value, 20,000 shares authorized,
Voting 2,189 and 611 shares outstanding 62,890 54,450
Non-voting stock, no par value -0- and
39 shares outstanding -- 5,817
Warrants for common stock 813 1,175
Deferred compensation (4) (38)
Accumulated deficit (63,660) (59,549)
-------- --------
Total stockholders' equity 39 1,855
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,154 $ 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)
For the Years Ended
December 31,
2003 2002 2001
---- ---- ----
REVENUE $ 977 $ 5,120 $ 22,587
COST OF REVENUE 415 2,846 13,147
-------- -------- --------
GROSS PROFIT 562 2,274 9,440
OPERATING EXPENSES:
Product development 123 147 4,102
General and administrative 1,845 2,062 7,827
Sales and marketing 359 952 7,059
Restructuring charges -- -- 4,442
Loss on impairment of assets 530 -- 1,314
Loss on impairment of inventory 288 -- --
Non cash stock expense 53 71 600
Depreciation and amortization 1,872 1,947 3,016
-------- -------- --------
Total operating expenses 5,070 5,179 28,360
-------- -------- --------
Loss from operations (4,508) (2,905) (18,920)
OTHER INCOME (EXPENSE):
Impairment of investments -- -- (44,903)
Interest income -- 32 223
Interest expense (48) (219) (215)
Minority interest 2 -- --
Gain on sale of fixed assets 85 -- --
Gain on settlement of lawsuit 225 -- --
Realized gain (loss) on investment 56 (17) 208
Unrealized gain on investment 50 -- --
Other income (expense) 27 (86) (239)
-------- -------- --------
Total other income (expense), net (397) (290) (44,926)
-------- -------- --------
NET LOSS BEFORE TAXES
AND EXTRAORDINARY GAIN (4,111) (3,195) (63,846)
PROVISION (BENEFIT) FOR TAXES -- -- (8,000)
-------- -------- --------
NET LOSS BEFORE EXTRAORDINARY GAIN (4,111) (3,195) (55,846)
EXTRAORDINARY GAIN -- -- 450
-------- -------- --------
NET LOSS $ (4,111) $ (3,195) $(55,396)
======== ======== ========
NET LOSS BEFORE EXTRAORDINARY GAIN:
Per share basic $ (3.28) $ (4.92) $ (86.40)
Per share diluted $ (3.28) $ (4.92) $ (86.40)
======== ======== ========
EXTRAORDINARY GAIN, per share basic $ -- $ -- $ 0.72
======== ======== ========
EXTRAORDINARY GAIN, per share diluted $ -- $ -- $ 0.72
======== ======== ========
NET LOSS:
Per share basic $ (3.28) $ (4.92) $ (85.68)
======== ======== ========
Per share diluted $ (3.28) $ (4.92) $ (85.68)
======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 1,253 649 647
Diluted 1,253 649 647
The accompanying notes to consolidated financial
statements are an integral part of these statements.
F-5
NAVIDEC, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 2003, 2002, and 2001
(In thousands)
Voting Non-Voting Warrants for
Common Stock Common Stock Common
Shares Amount Shares Amount Stock
------ ------ ------ ------ -----
Balances, December 31, 2000 608 $ 53,775 39 $ 5,817 $ 1,141
Issuance of re-priced options -- 883 -- -- --
Amortization for accelerated
vesting of options -- -- -- -- --
Cancellation of re-priced options -- (126) -- -- --
Amortization of deferred
compensation -- -- -- -- --
Warrants issued -- -- -- -- 34
Unrealized loss on investments,
net of taxes of $(470) and
reclassification adjustment for
realized gain of $208 -- -- -- -- --
Comprehensive loss -- -- -- -- --
Net loss -- -- -- -- --
---------------------------------------------------------------
Balances, December 31, 2001 608 $ 54,532 39 $ 5,817 $ 1,175
===============================================================
Cancellation of re-priced options -- (82) -- -- --
Exercise of employee stock options 3 -- -- -- --
Amortization of deferred compensation -- -- -- -- --
Realization of comprehensive loss -- -- -- -- --
Comprehensive loss -- -- -- -- --
Net Loss -- -- -- -- --
---------------------------------------------------------------
Balances, December 31, 2002 611 $ 54,450 39 $ 5,817 $ 1,175
===============================================================
Warrant expiration -- 362 -- -- (362)
Rights offering 797 1,237 -- -- --
Debenture conversion 139 268 -- -- --
Subscription notes receivable 179 375 -- -- --
Amortization of deferred
compensation -- -- -- -- --
Conversion of voting to non-voting 39 5,817 (39) (5,817) --
Re-class of organization costs -- 1 -- -- --
Rescission of subscription notes
receivable (179) (375) -- -- --
Executive compensation for foregone
salary -- 97 -- -- --
Private placement 350 332 -- -- --
Purchase of Northsight 203 247 -- -- --
Shares issued for debenture interest 3 9 -- -- --
Options issued -- 70 -- -- --
Exercise of employee stock options 47 -- -- -- --
Net Loss -- -- -- -- --
----------------------------------------------------------------
Balances, December 31, 2003 2,189 $ 62,890 -- $ -- $ 813
===============================================================
F-6 (continued)
NAVIDEC, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (continued)
For the Years Ended December 31, 2003, 2002, and 2001
(In thousands)
Accumulated
Other Total
Comprehensive Accumulated Comprehensive Sub Notes Deferred Stockholders
Income Deficit Income(Loss) Receivable Compensation Equity
------ ------- ------------ ---------- ------------ ------
Balances, December 31, 2000 $ 792 $ (958) $ -- $ -- $ -- $ 60,567
Issuance of re-priced options -- -- -- -- (883) --
Amortization for accelerated
vesting of options -- -- -- -- 234 234
Cancellation of re-priced options -- -- -- -- 126 --
Amortization of deferred
compensation -- -- -- -- 332 332
Warrants issued -- -- -- -- -- 34
Unrealized loss on investments,
net of taxes of $(470) and
reclassification adjustment for
realized gain of $208 (804) -- (804)
Comprehensive loss -- -- (56,200)
======
Net loss -- (55,396) (55,396)
------------------------------------------------------------------------------
Balances, December 31, 2001 $ (12) $(56,354) $ -- $ -- $ (191) $ 4,967
==============================================================================
Cancellation of re-priced options -- -- -- 82 --
Exercise of employee stock options -- -- -- -- -- --
Amortization of deferred compensation -- -- -- -- 71 71
Realization of comprehensive loss 12 -- -- -- 12
Comprehensive loss -- -- (3,183)
=====
Net Loss -- (3,195) -- -- (3,195)
------------------------------------------------------------------------------
Balances, December 31, 2002 $ -- $(59,549) $ -- $ -- $ (38) $ 1,855
==============================================================================
Warrant expiration -- -- -- -- -- --
Rights offering -- -- -- -- -- 1,237
Debenture conversion -- -- -- -- -- 268
Subscription notes receivable -- -- -- (375) -- --
Amortization of deferred
compensation -- -- -- -- 34 34
Conversion of voting to non-voting -- -- -- -- -- --
Re-class of organization costs -- -- -- -- -- 1
Rescission of subscription notes
receivable -- -- -- 125 -- --
250
Executive compensation for foregone
salary -- -- -- -- -- 97
Private placement -- -- -- -- -- 332
Purchase of Northsight -- -- -- -- -- 247
Shares issued for debenture interest -- -- -- -- -- 9
Options issued -- -- -- -- -- 70
Exercise of employee stock options -- -- -- -- -- --
Net Loss -- (4,111) (4,111)
------------------------------------------------------------------------------
Balances, December 31, 2003 $ -- $(63,660) $ -- $ -- $ (4) $ 39
==============================================================================
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)
For the Years Ended December 31,
2003 2002 2001
---- ---- ----
Cash flows from operating activities:
Net loss $ (4,111) ($ 3,195) $(55,396)
Adjustments to reconcile net income loss
to net cash used in operating activities:
Depreciation and amortization 1,872 1,947 3,016
Extraordinary gain -- -- (450)
Non-cash compensation expense related to options 70 -- --
Provision for bad debt expense 4 268 796
Write-off of notes receivable and accrued interest -- -- 1,661
Provision (benefit) for deferred taxes -- -- (8,000)
Non-cash salary expense related to forgone salary 97 -- --
Loss (Gain) on sale of investments (56) 16 (208)
Write down of investments -- -- 44,903
Non-cash stock expense 53 71 600
Loss (Gain)on sale/disposal of assets (85) -- 48
Impairment charges 530 -- 1,314
Changes in operating assets and liabilities:
Restricted cash -- 1,200 (1,200)
Accounts receivable 331 1,768 1,576
Costs and estimated earnings in excess of billings -- -- 1,545
Inventory 288 64 191
Prepaid expenses and other assets (60) (1,048) 515
Accounts payable (151) (1,841) 149
Deferred Revenue (108) -- --
Net proceeds from trading activities (259) -- --
Accrued liabilities and other 215 (1,051) (2,082)
-------- -------- --------
Net cash used in operating activities (1,370) (1,801) (11,022)
Cash flows from investing activities:
Purchase of property, equipment and software -- (61) (1,014)
Proceeds from sale of equipment 124 41 232
Repayment of notes receivable -- -- 2,100
Cash acquired in acquisition 22 -- --
Proceeds from the sale of marketable debt securities -- -- 2,990
Funding of notes receivable related parties -- -- (528)
Settlement costs from CarPoint sale -- -- (815)
Minority interest income (2) -- --
Other (4) -- --
Sale (Purchase) of investments -- 601 7,736
-------- -------- --------
Net cash provided by (used in) investing activities 140 581 10,701
Cash flows from financing activities:
Payments on notes payable and capital lease obligations (176) (1,867) (1,689)
Proceeds from borrowing -- 485 1,000
Proceeds from issuance of convertible debt -- 250 --
Proceeds from issuance of common stock 1,569 -- --
Payment for offering and deferred financing costs -- 17 --
Interest paid with common stock 9 -- --
-------- -------- --------
Net cash provided by (used in) financing activities 1,402 (1,115) (689)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 172 (2,335) (1,010)
Cash and cash equivalents, beginning of year 130 2,465 3,475
-------- -------- --------
Cash and cash equivalents, end of year $ 302 $ 130 $ 2,465
======== ======== ========
Cash paid for interest $ 26 $ 219 $ 215
-------- -------- --------
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
NOTE 1 - ORGANIZATION, BUSINESS AND LIQUIDITY
Navidec, Inc., a Colorado corporation (Navidec or the "Company"), was
incorporated in 1993. Navidec is organized into three divisions, Financial
Services, Technology, and Mortgage Services. In October of 2002, Navidec formed
a new wholly owned subsidiary Navidec Capital, Inc, which was renamed Navidec
Financial Services, Inc. (`NFS") in August 2003. In August 2003, Navidec
Technology Corporation was formed as a wholly owned subsidiary of Navidec, Inc.
and in October 2003, changed its name to SwiftSure, Inc. On September 11, 2003,
the Company entered into an agreement with Northsight Mortgage Group, LLC
("Northsight") and its sole member that provided for the transfer of 80% of the
issued and outstanding membership units of Northsight to Navidec for Navidec
common stock (see Note 18).
NAVIDEC'S SERVICES
Financial Services
NFS provides consulting, personnel, and services to emerging growth micro and
small capitalization companies to help them effectively structure transactions
to attract public and private capital. NFS also provides financial public
relations services. Navidec provides those resources on a contract basis so the
entrepreneur can focus on growing the business. After evaluating a potential
client for their probability of success and determining the entity's growth
strategy and anticipated capital requirements, NFS provides specific
recommendations, personnel, and services to work in concert with the companies
to develop and execute financial transactions. NFS receives fees from its
clients for services provided. In addition, NFS may also invest its own capital
in clients with whom they've contracted. As part of its compensation from
clients, NFS may also receive equity options. Typically NFS seeks clients who
are well managed, offer cash flow and the opportunity for long-term growth.
Mortgage Services
Mortgage Services is focused on providing end to end mortgage services from back
office processing to mortgage banking services. On September 11, 2003, the
Company entered into an agreement with Northsight Mortgage Group, LLC
("Northsight") and its sole member that provided for the transfer of 80% of the
issued and outstanding membership units of Northsight to Navidec for Navidec
common stock (see Note 18). Northsight is a Scottsdale, Arizona based mortgage
broker engaged in the business of marketing, arranging and selling of consumer
home mortgages. The Company plans to acquire and integrate companies providing
these services.
Technology
In 2003, Navidec Technology provided quality solutions that enabled
organizations to manage secure access to web applications within the enterprise
and across the business value chain. Navidec's suite of proven solutions enable
an enterprise to deliver single sign on capabilities to their employees,
customers, suppliers and partners by providing an identity management
F-8
infrastructure for user management, access control, and a single entry point to
personalized enterprise resources. Navidec Technology provided consulting and
expert engineering services in Web security and Identity Management in the areas
of Authentication, Access Control, Directory, User Management, and Provisioning.
This was done through the integration and extension of best-of-breed portal,
directory, security and integration software developed by the leading internet
software vendors. As a result of declining technology revenues and an inability
to realize a profit from technology business operations, Management believes
that discontinuation of these operations would not have a material impact on
overall future revenues but would provide an avenue for continued reduction in
operating expenses. As such, Navidec may discontinue Navidec Technology
operations in the second quarter of 2004.
CONTINUED OPERATIONS
At December 31, 2003 the Company had a working capital deficit of approximately
$311,000 and stockholders' equity of approximately $39,000. The Company had a
net loss of $4,111,000, $3,195,000, and $55,396,000 for the years ended December
31, 2003, 2002, and 2001 respectively. Additionally, the Company may discontinue
its Navidec Technology operations in second quarter of 2004, and focus on
services for which it has a limited operating history.
These factors indicate a substantial doubt that the Company will be able to
continue operations as a going concern, which contemplates the realization of
assets and liquidation of liabilities in the normal course of business. The
financial statements do not include any adjustments that might be necessary
should the Company be unable to continue operations.
Navidec is subject to various risks and uncertainties. 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 bases,
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.
The Company has implemented a plan of action in order to sustain operations.
During 2003 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.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Navidec and its subsidiaries. All significant inter-company balances and
transactions have been eliminated in consolidation.
F-9
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.
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. For fiscal 2003 significant estimates were made with respect to
contingent liabilities that were recorded with regard to certain pending
lawsuits (See Item 3) and with regards to the impairment of inventory and fixed
assets (See Note 7).
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.
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. Management reviews accounts receivable periodically and reduces the
carrying amount by a valuation allowance that reflects management's best
estimate of the amount that may not be collectible. 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 $4,000 and $2,281,000 as of December 31, 2003 and 2002,
respectively.
Sales to unaffiliated customers, which represented 10% or more of the Company's
Sales for the year ended December 31, 2003 and 2002, were as follows (as a
percentage of sales):
Customer 2003 2002
-------- ---- ----
A 13.3% 20.5%
B 28.4% <1%
No customers represented 10% or more of the company's total revenue for 2001.
F-10
INVESTMENTS
Investments in publicly traded equity securities over which Navidec does not
exercise significant influence are recorded at market value in accordance FAS
No. 115, "Accounting for Certain Investments in Debt and Equity Securities,"
which requires that all applicable investments be classified as trading
securities, available-for-sale securities or held-to-maturity securities. The
Company has one investment treated as a trading security that is restricted from
sale in the open market under Section 144 and has limited trading volume, we
believe the fair value of the investment is less than the recorded value under
FAS No. 115. Due to the size of the investment and its limited trading volume,
there can be no assurance that we will realize the recorded value of this
investment.
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 included the following for the years ended
December 31, 2003 and 2002 (in thousands):
December 31, 2003
Unrealized Carrying
Cost Gain Value
---- ---- -----
Marketable securities $ 266 $ 50 $ 316
======== ========= ============
December 31, 2002
Unrealized Carrying
Cost Gain Value
---- ---- -----
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 Navidec sold marketable
securities with a basis of $29,000 for $12,000, realizing a loss of $17,000.
During parts of 2003, the Company had excess cash available to it, not
immediately required for operations. Since money market and other yields on
short-term investments were nearly zero, management elected to open a managed,
discretionary trading account to invest approximately $200,000 of its excess
cash in an attempt to improve yields. The investment style utilized by the
account manager involved short-term investments and rapid turnover periodically
utilizing margin in order to take advantage of trends recognized by the manager.
During the year ended December 31, 2003, total purchases of marketable
securities in the Company's account were $20,992,000 and total sales of
marketable securities in the account were $21,041,000 resulting in short term
capital gains totaling $56,000 during that period.
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 to $0 and $288,000 at December 31, 2003 and 2002
respectively.
F-11
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
Intangible assets are amortized on a straight-line basis over their estimated
useful lives. Goodwill is evaluated annually to determine if its value has been
impaired. On September 11, 2003, the Company entered into an agreement with
Northsight Mortgage Group, LLC ("Northsight") and its sole member that provided
for the transfer of 80% of the issued and outstanding membership units of
Northsight to Navidec resulting in the realization of $190,000 of goodwill.
Management has determined that due to the recent time frame of this acquisition
no impairment should be realized for fiscal 2003.
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 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 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
F-12
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 2003. The remaining revenue is from
time 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.
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 $9,000, $14,000, $128,000, in 2003, 2002
and 2001, 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 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.
F-13
ACCRUALS
Accrued expenses include the following at December 31 (in thousands):
2003 2002
---- ----
Accrued compensation and commissions $ 47 $ 34
Accrued property taxes 37 --
Accrued restructuring charges -- 50
Accrued litigation expenses 250
Other 10 54
------ -------
$ 344 $ 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.
STOCK BASED COMPENSATION
As permitted under the Statements of Financial Accounting Standards No. 123
("SFAS 123"), "Accounting for Stock-Based Compensation," the Company accounts
for its stock-based compensation for options issued to employees in accordance
with the provisions of Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB 25"). As such, for options granted to
employees and directors, compensation expense is recorded on a straight-line
basis over the shorter of the period that the services are provided or the
vesting period, only if the current market price of the underlying stock exceeds
the exercise price. Certain pro forma net income and earnings per share
disclosures for employee stock option grants are also included in the notes to
the financial statements as if the fair value method as defined in SFAS 123 had
been applied. Transactions in equity instruments with non-employees for goods or
services are accounted for by the fair value method.
Had compensation cost for the Plan been determined based upon the fair value at
the grant date for options granted, consistent with the provisions of SFAS 123,
the Company's net loss and net loss per share would have been increased to the
pro forma amounts indicated below:
For the Years Ended
December 31,
(in thousands, except per share data)
2003 2002 2001
---- ---- ----
Net loss: $ (4,111) $(3,195) $ (55,396)
Add back:
Expense recognized under APB 25 70 -- --
--------- ------- ----------
(4,041) (3,195) (55,396)
Net total stock based employee
compensation expense determined under fair
value based method for all awards,
net of related tax effect (483) (18) 235
--------- ------- ----------
Pro forma net loss $ (4,524) $(3,213) $ (55,161)
========= ======= ==========
Net loss per share, basic and diluted
Basic: As Reported $ (3.28) $ (4.92) $ (85.68)
========= ======= ==========
Pro Forma $ (3.61) $ (4.95) $ (85.32)
========= ======= ==========
Diluted: As Reported $ (3.28) $ (4.92) $ (85.68)
========= ======= ==========
Pro Forma $ ( 3.61) $ (4.95) $ (85.32)
========= ======= ==========
F-14
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 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,
2003 2002 2001
---- ---- ----
Weighted average common shares 1,253 649 647
Stock options -- -- --
Warrants -- -- --
----- ----- -----
Weighted average diluted shares 1,253 649 647
===== ===== =====
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:
2003 2002 2001
---- ---- ----
Navidec stock options 276 285 47
Convertible debt 139 -- --
Warrants 712 21 125
----- --- ---
Total anti-dilutive shares excluded 1,127 306 172
===== === ===
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes the following adjustments to net income
(loss) for the years presented (in thousands):
2003 2002 2001
---- ---- ----
Gross unrealized gain (loss) $ -- $ -- $(1,066)
Reclassification adjustment for gain on sale -- 12 (208)
Income taxes -- -- 470
------- ------- -------
$ -- $ 12 $ (804)
======= ======= =======
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics
of Both Liabilities and Equity, was issued in May 2003 and requires issuers to
classify as liabilities (or assets in some circumstances) three classes of
freestanding financial instruments that embody obligations for the issuer. SFAS
F-15
No. 150 is effective for financial instruments entered into or modified after
May 31, 2003 and is otherwise effective at the beginning of the first interim
period beginning after June 15, 2003. Management believes the adoption of SFAS
No. 150 had no material impact on its financial position or results of
operations.
The FASB issued Interpretation ("FIN") No.45, Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others in November 2002 and FIN No. 46 Consolidation of variable
Interest Entries, in January 2003, FIN No. 45 is applicable on a prospective
basis for initial recognition and measurement provisions to guarantees issued
after December 2002, however, disclosure requirements are effective immediately.
FIN No. 45 requires a guarantor to recognize, at the inception of a guarantee, a
liability for the fair value of the obligations undertaken in issuing the
guarantee and expands the required disclosures to be made by the guarantor about
its obligation under certain guarantees that it has issued. The adoption of FIN
No. 45 did not have a material impact on the Companies financial position or
results of operations. FIN No. 46 requires that a company that controls another
entity through interest other than voting interest should consolidate such
controlled entity in all cases for interim periods beginning after June 15,
2003. The adoption of FIN No. 46 had no material impact on its financial
position or results of operations.
NOTE 3 - PROPERTY, EQUIPMENT AND SOFTWARE
Property, equipment and software consists of the following (in thousands):
December 31,
Useful Lives 2003 2002
------------ ---- ----
Computers, software and equipment 3 to 4 years $ 733 $ 3,195
Software 3 years 1,561 2,313
Furniture and office equipment 4 to 5 years 318 2,450
Leasehold improvements Lease term 0 918
------- -------
2,612 8,876
Less accumulated depreciation (2,443) (6,954)
------- -------
Net property, equipment and software $ 169 $ 1,922
======= =======
Depreciation expense was $1,230,000, $1,552,000 and $3,016,000 2003, 2002 and
2001, respectively.
NOTE 4 - BORROWINGS Borrowings consist of the following:
December 31,
2003 2002
---- ----
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 March 15, 2004,
interest at 4.0% 101 74,000
-------- --------
101 307,000
Less - current 101 307,000
-------- --------
Long term portion $ -- $ --
======== ========
F-16
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 was paid in full
in June 2003.
NOTE 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:
2003 2002
---- ----
Furniture, computers and equipment $ 663,000 $ 2,965,000
Less - accumulated depreciation (546,000) (2,033,000)
----------- -----------
Net book value $ 117,000 $ 932,000
=========== ===========
Navidec acquired no property under capital lease arrangements in 2003 and 2002.
As of December 31, 2003, future minimum payments under the Company's capital
leases are as follows:
Year ended December 31
2004
----
Total minimum payments 184,500
Less interest (4,500)
---------
Total obligation 180,000
Less - current portion (180,000)
---------
Long-term obligations $ --
=========
Cash paid for interest was $26,000, $219,000, and $215,000 in 2003, 2002 and
2001, respectively.
The Company is not current with payments on three of its capital lease
obligations totaling $ 68,800.
NOTE 6 - INCOME TAXES
The provision for income taxes consists of the following (in thousands):
Year Ended December 31,
2003 2002 2001
---- ---- ----
Current:
Federal $ -- $ -- $ --
State -- -- --
Total current provision -- -- --
Deferred:
Federal (1,531) (874) (20,398)
State (131) (79) (3,192)
Valuation allowance 1,662 953 15,590
-------- -------- --------
Total deferred provision (benefit) -- -- (8,000)
Total provision (benefit) $ -- $ -- $ (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 to earnings before income taxes are as follows:
Year Ended December 31,
2003 2002 2001
---- ---- ----
Expected rate (35.0)% (35.0)% (35.0)%
State taxes, net of federal deduction (3.1) (3.2) (3.2)
Other permanent items -- -- 1.3
Valuation allowance 38.1 38.2 24.4
-------- -------- --------
0.0% 0.0% (12.5)%
======== ======== ========
The components of the net deferred income tax assets (liabilities) are as
follows (in thousands):
December 31,
2003 2002 2001
---- ---- ----
Current assets (liabilities):
Investments $ -- $ -- $ (3)
Accruals and other (39) 77 (172)
Bad debt reserves 2 867 1,443
Net operating losses 37
Valuation allowance 0 (944) (1,268)
-------- -------- --------
Non-current assets (liabilities):
Basis difference in CarPoint -- -- (53)
Net operating losses 17,116 14,848 13,350
Property and equipment 1,015 751 1,025
Stock options 74 -- --
Valuation allowance (18,205) (15,599) (14,322)
-------- -------- --------
Net deferred tax liability $ -- $ -- $ --
======== ======== ========
At December 31, 2003, for income tax purposes, Navidec had approximately $45
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 will limit the net operating loss carryforwards available to be used by the
Company in any given year if certain events occur, primarily the result of
changes in ownership interests. Due to these events the net operating loss
carryforward may be subject to severe limitations pursuant to IRS section 382
and may not be utilized.
During 2003, 2002, and 2001 the Company increased its valuation allowance by
$1,662,000, $953,000, and $15,590,000 respectively to fully reserve its net
deferred tax asset. This was done primarily because of uncertainty relating to
the Company's ability to realize its net operating loss carryforwards due to
these events.
Navidec paid no income taxes during the three years ended December 31, 2003.
F-18
NOTE 7 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
Navidec leases certain facilities under operating leases that expire on October
31, 2004 and on June 30, 2006. Future minimum lease payments for such operating
leases are as follows as of December 31, 2003:
Year ended December 31
2004 $191,000
2005 137,000
2006 68,000
--------
$396,000
========
Rental expense related to these leases was $812,000, $822,000 and $1,840,000 for
2003, 2002, and 2001, 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 $4,162, $19,000, and $99,000 during 2003, 2002 and 2001,
respectively.
LITIGATION
In the normal course of business, Navidec is subject to, and may become a party
to, litigation regarding disputes with vendors and employment issues. Management
believes there are no other matters currently in litigation, other than those
described below, that could have a material impact on Navidec's financial
position or results of operations.
In 1999, Navidec purchased a software system and one year of support services
from a vendor. In the transaction, Navidec executed a payment plan agreement.
The vendor subsequently assigned the payment plan agreement to a finance
company. The finance company has sued under the payment plan agreement, alleging
that Navidec has defaulted and owes $258,418 plus attorneys fees, costs and
expenses under the payment plan agreement. As defenses, Navidec has asserted,
among other claims, that it reached an agreement with the original vendor on
January 28, 2002 whereby the vendor agreed that if Navidec packaged all unused
software and documentation and removed the unused software from its systems, the
return of the software would end all of Navidec's rights to use the software and
would end all payment obligations. In addition, Navidec has asserted that the
vendor breached its agreement to provide sales and customers to Navidec. Navidec
has asserted counterclaims and third party claims against the vendor for
promissory estoppel and breach of contract. No formal discovery has occurred and
trial is set for June 17, 2004. There is a risk that at trial judgment may enter
against Navidec for some or all of amount sought by the finance company plus
costs and reasonable attorneys' fees. For this reason, management is exploring
the possibility of settlement in an attempt to avoid trial.
On October 10, 2003, our former Chief Financial Officer ("CFO") filed a Demand
For Arbitration against the Company relating to sums that the CFO claims are
owing to him from the Company as a result of his employment being terminated. He
seeks to recover $452,508.15 plus statutory penalties, attorneys' fees, costs
and pre-judgment interest. We have filed counterclaims in the arbitration for
breach of contract, breach of fiduciary duty, and conversion and seek damages of
$1 million to $5 million. These matter are in the very early stages and the
Company intends to defend any claims by the CFO vigorously. Because we are
F-19
unable to conclude at this time that an unfavorable outcome in this matter is
either "probable" or "remote" (as such terms are defined in the ABA Statement of
Policy), we decline to comment as to the outcome of this matter.
NOTE 9 - RELATED PARTY TRANSACTIONS
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.
During 2001, Navidec sold $52,000 worth of inventory at cost to XCEN28, Inc,
whose primary shareholder is the nephew of Navidec's former 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 could 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
total these individuals received 69,444 shares of common stock and 1,676 shares
for accrued interest through the conversion of their debentures.
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 Financial Services,
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.
In December 2003, the Board of Directors of Navidec voted to exchange 600,000
options to purchase Navidec common stock for all of the outstanding rights
(approximately 25,000,000) to purchase common stock of Navidec Financial
Services, Inc. The exercise price of these options is $1.30 and they are
exercisable for 5 years. These options are to be issued once Navidec has adopted
a new stock option plan.
In October of 2003, the Company made a $200,000 investment in the Kirby
Enterprise Fund (the Fund) for which a control person is also a person of
beneficial ownership in the Company. The Fund is a limited liability company
organized to invest in the equities security markets.
NOTE 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.
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 could purchase a minimum of $250,000 and a maximum of $5 million in
F-20
aggregate principal amount of convertible debentures. The Company was 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 into 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
converted their debentures on or before the expiration of the Rights Offering
(see below), the Holder would receive Rights to acquire the same number of
common shares at a price of $1.80 per share. The Company incurred $18,000 of
expense in connection with the issuance of these rights. None of the Holders
exercised these rights.
On June 9, 2003, the Holders converted and the Company issued 138,889 shares of
Common Stock and 3,352 shares for accrued interest. Debentures totaling $125,000
were sold to current and former officers/directors of the Company. In total
these individuals received 69,444 shares of common stock and 1,676 shares of
common stock for accrued interest through the conversion of their debentures.
RIGHTS OFFERING
The Company's board of directors and shareholders 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.
The Rights Offering commenced on May 8, 2003. The Rights were represented by
Subscription Certificates and were traded on the OTC Bulletin Board. The Rights
automatically expired 30 days after they were approved for trading. The Company
issued 796,692 shares and raised net proceeds of $1,237,500 in connection with
this offering.
OFFERINGS
The following table summarizes Common Stock and Warrants issued in connection
with public and private offerings since Navidec went public in February 1997
through December 31, 20003:
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
Rights Offering 6/2003 796,692 -- $ 1.80 -- $ 196,548 $ 1,237,500
Private Placement 9/2003* 349,500 699,000 $ 1.00 $ 2.00/$4.00 $ 17,800 $ 331,700
* The Private Placement closed in February of 2004. The Company sold an
additional 215,000 common shares and 430,000 warrants, resulting in additional
net proceeds of $207,000.
F-21
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. These shares
were issued as non-voting because at the time, WFC held other Navidec, Inc.
common shares and these additional shares would have put them out of compliance
with certain banking regulations regarding the number of voting shares that they
could hold. In August 2003 the non-voting restriction was removed as the total
number of the Company's shares WFC held was in compliance with the regulations.
ISSUANCE OF WARRANTS
The following table summarizes activity for warrants issued:
2003 2002 2001
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding at
beginning of year 20,953 $ 86.96 20,953 $ 86.96 15,397 $ 115.10
Granted 699,000 3.00 -- -- 5,556 9.00
Exercised -- -- -- -- -- --
Forfeited and cancelled (8,453) (42.79) -- -- -- --
-------- --------- -------- -------- -------- ----------
Outstanding at end of year 711,500 $ 4.09 20,953 $ 86.96 20,953 $ 86.96
-------- --------- -------- --------- --------
Exercisable at end of year 711,500 $ 4.09 20,953 $ 86.96 20,953 $ 86.96
-------- --------- -------- --------- -------- ----------
Weighted average fair value
of warrants granted during year N/A N/A $ 6.10
========= ========= ==========
The following table summarizes the warrants outstanding for the Company's common
stock as of December 31, 2003:
Original
Exercise Issuance Remaining
Warrants Units Price Value Contractual Life
-------- ----- ----- ----- ----------------
G 6,944 $112.28 780,000 .75 years
H 5,556 $6.10 34,000 3.00 years
A 349,500 $2.00 -- 1.66 years
B 349,500 $4.00 -- 1.66 years
------- --------
711,500 $814,000
------- ========
F-22
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 111,111 shares of the Company's common stock to employees and directors of
the Company. Under the Plan, the exercise price per share of a incentive and
non-qualified stock option must be equal to at least 100% and 50% respectively
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 111,111 to 166,667 the number of shares of common stock issuable
under the Plan.
The Company intends to adopt a new Stock Option Plan in April 2004. A total of
160,000 options that are to be granted to the Board of Directors for their
services in 2003 will be issued once the Plan is adopted.
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 re-priced 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 of 2003 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:
2003 2002
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
Outstanding at
beginning of year 35,000 $ 0.00 42,000 $ 0.00
Granted 29,767 $ 0.00 -- --
Exercised (46,674) $ 0.00 (3,000) $ 0.00
Forfeited and cancelled (7,075) $ 0.00 (4,000) $ 0.00
------- -------- ------- --------
Outstanding at end of year 11,018 $ 0.00 35,000 $ 0.00
------- -------- ------- --------
Exercisable at end of year 10,771 $ 0.00 27,000 $ 0.00
------- -------- ------- --------
F-23
The status of stock options outstanding and exercisable under the Plan as of
December 31, 2003 is as follows:
Stock Options Outstanding Stock Options Exercisable
------------------------- -------------------------
Weighted
Weighted Average Weighted
Average Remaining Average
Number of Exercise Contractual Number of Exercise
Shares Price Life (Years) Shares Price
11,018 $ 0.00 3.00 10,771 $ 0.00
14,583 $ 5.66 3.00 8,947 $ 5.66
------ ------
25,601 19,718
====== ======
The following table summarizes activity for options issued at the money and
outside the plan:
2003 2002 2001
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding at
beginning of year 264,583 $ 2.01 5,278 $ 129.06 110,889 $ 113.04
Granted 0 0.00 264,583 $ 2.01 -- --
Exercised (0) 0.00 -- -- -- --
Forfeited and cancelled (0) 0.00 (5,278) $ 129.06 (105,611) $ 135.18
-------- -------- -------- --------- -------- ----------
Outstanding at end of year 264,583 $ 2.01 264,583 $ 2.01 5,278 $ 125.46
======== ======== ======== ========== ======== ----------
Exercisable at end of year 258,947 $ 2.01 -- 5,000 $ 129.06
======== ======== -------- ======== ----------
Weighted average fair value
of options granted during year $ 0.00 $ 1.75 $ N/A
======== ========= ==========
NOTE 11 - BUSINESS SEGMENT INFORMATION
Navidec has organized its operations around three separate business segments at
the end of 2003 Financial Services, Mortgage Services and Technology. In years
prior to 2002 the company also had business segments for: eSolutions, Product
Distribution, and DriveOff.com (formerly, "Automotive").
Financial Services focuses its' efforts on providing consulting, personnel, and
services to emerging growth micro and small capitalization companies to help
them effectively structure transactions to attract public and private capital.
NFS also provides financial public relations services.
Mortgage Services is focused on providing end to end mortgage services from back
office processing to mortgage banking services.
In 2003, Technology provided custom solutions, including the architecture,
design, development and integration of high-tech solutions, utilizing Web
technology.
Prior to 2002, Product Distribution provided for the resale and configuration of
third party software and hardware components, graphical printers and supplies.
F-24
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, 2003
(in thousands)
Technology Financial Mortgage(f)Services Corporate Total
---------- --------- ------------------- --------- -----
Revenues from external
customers $ 776 $ 5 $ 196 $ -- $ 977
Gross profit $ 562 $ -- $ -- $ -- $ 562
Loss from operations $ (196) $ (116) $ 148 $(4,344)(a) $(4,508)
Identifiable assets $ 273 $ 70 $ 77 $ 734(b) $ 1,154
Year Ended December 31, 2002
(in thousands) (f)
Technology Financial (e) 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
Year Ended December 31, 2001
(in thousands) (d)(f)
Product
Technology (g) 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 $ -- (c) $ 8,159 (b) $ 10,612
(a) Corporate loss from operations represents restructuring charges, losses on
impairment of assets and restructured receivables, non-cash stock expense and
depreciation.
(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, pre-paids and other assets,
and investments.
F-25
(c) All assets associated with Product Distribution were sold or written off in
2001.
(d) Due to Product Distribution being sold or written off in 2001 there was no
activity in 2002.
(e) Navidec Financial Services was formed in 2002, as such there is no activity
prior to 2002.
(f) Mortgage Services began operations in October of 2003. As such there is no
activity prior to 2003.
(g) Formerly eSolutions
NOTE 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.
NOTE 13 - INVESTMENTS
Car Point, Inc.
In March 2001, Navidec concluded there had been other than a 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
F-26
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. During 2003, the Company bought
and sold a variety of marketable securities with a basis of $200,000 resulting
in a gain of $56,000 being included in other income.
In October of 2003 the Company made a $200,000 investment in the Kirby
Enterprise Fund (the Fund), which is a limited liability company organized to
invest in the equities security markets.
NOTE 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 accrued $446,000 for employees terminated during
2001. The remaining restructuring charge of $50,000 consists primarily of costs
associated with the Company's termination of its lease for software, which is no
longer needed.
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 abandonment 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 last three years, including the remaining accrual balance at December
31, 2003 (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 -- --
F-27
NOTE 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.
NOTE 16 - QUARTERLY RESULTS (Unaudited)
2003
Q1 Q2 Q3 Q4(d) TOTAL
------ ----- ------ ----- -----
NET SALES $ 298 $ 33 $ 194 $ 452 $ 977
GROSS MARGIN 150 15 86 311 562
NET INCOME (LOSS) (1,022) (850) (514) (1,725) (4,111)
EPS - BASIC (1.54) (1.12) (.31) (.31) (3.28)
DILUTED (1.54) (1.12) (.31) (.88) (3.28)
2002
Q1 Q2 Q3 Q4 (c) 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)
F-28
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) (a) (7,484) (b) (4,510) (b) (3,510) (b) (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)
(a) During the first quarter of 2001, the Company wrote down its investment in
CarPoint by $43.5 million.
(b) In the second, third and fourth quarters of 2001 Navidec reduced its
operating expenses through headcount reductions.
(c) During the fourth quarter of 2002, the Company wrote down its inventory by
$64,000 and increased its reserve for doubtful accounts by $158,000.
(d) During the fourth quarter of 2003, the Company wrote down its inventory by
$288,000 and recorded a loss on disposal of fixed assets of $530,000.
NOTE 18 - ACQUISITION OF NORTHSIGHT MORTGAGE GROUP, LLC
On September 11, 2003, the Company entered into a Securities Exchange Agreement
with Northsight Mortgage Group, LLC ("Northsight") and its sole member that
provides for the transfer of 80% of the issued and outstanding membership units
of Northsight to the Company in exchange for the issuance of up to 256,000
shares of the Company's no par value common stock valued at $320,000 based on
the shares publicly traded price on September 30, 2003. The remaining 20%
interest in Northsight has been recorded a minority interest in the consolidated
financial statements. Northsight is a Scottsdale, Arizona based mortgage broker
engaged in the business of marketing, arranging and selling of consumer home
mortgages. This purchase is part of the Company's plan to acquire non-technology
companies that have a positive cash flow, strong management and growth
potential. At the closing on September 30, 2003, 42,667 shares were issued to
the sole member of Northsight and the balance of 213,333 shares were placed in
escrow. Of these shares, 85,334 shares will be released in equal amounts on each
of the next three anniversary dates of the closing of the transaction. Pending
the completion of an audit of operations of Northsight for the year ending
December 31, 2003, up to remaining 128,000 shares are to released. For each $100
of earnings before interest, taxes, depreciation and amortization expense
("EBITDA") in excess of $100,000 of EBITDA, 128 additional shares of Navidec
will be released from escrow. The EBITDA for the year was $158,950. As a result
an additional 75,456 shares are being released from escrow as the final payment.
F-29
These shares are valued at $1.15 (the closing stock price on December 31, 2003)
resulting in a total increase to the purchase price of $86,775 and a total
purchase price of $246,775. Prior to this transaction, there was no relationship
between the Company or any of the its officers and directors and Northsight or
its sole member.
The following is the condensed balance sheet of Northsight as of the acquisition
date:
ASSETS
Cash $ 26,000
Accounts receivable 240
Prepaid expenses 10,406
Fixed assets, net 40,315
Intangible asset 103,070
Deposits 3,793
--------
$183,824
========
LIABILITES AND MEMBER'S EQUITY
Accounts payable $ 9,593
Member's equity 174,231
--------
$183,824
========
The following information is presented on a pro forma basis for the year ended
December 31, 2003. (in thousands, except for per share amounts)
2003
---------------------------------------
Navidec * Northsight** Total
--------- ------------ -----
Revenue $ 781 $1,303 $ 2,084
Net (loss) income
$ (4,105) $ 148 $ (3,957)
Earnings per share
$ (3.28) $ .12 $ (3.16)
* Does not include Northsight operations.
** Represents 100% of Northsight operations for 2003.
NOTE 19 - NASDAQ DELISTING
On August 18, 2003, the Company received notice from NASDAQ SmallCap Market that
the Company was not in compliance in accordance with Marketplace Rule
4310(c)(13) which requires that the company have a minimum $2,500,000 in
stockholders' equity. As a result, Navidec began trading on OTC Bulletin Board
under the symbol NVDC at the open of business on Wednesday, August 20, 2003.
F-30
NOTE 20 - SUBSEQUENT EVENTS
The Company was advised in a letter dated February 24, 2004 that the Securities
and Exchange Commission (the "Commission") is conducting an informal inquiry
into the restatement of the Company's financial statements for the periods
ending March 31, 2003 and June 30, 2003. The Commission made an informal request
that the Company voluntarily produce certain documents. The Company has provided
the requested documents to the Commission.
As a result of declining revenues and an inability to realize a profit from
Navidec Technology business operations, Navidec may discontinue Technology
operations in the second quarter of 2004.
F-31
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.
ITEM 9(a). CONTROLS AND PROCEDURES
During August 2003, the Company terminated the employment of its former Chief
Financial and Accounting Officer and commenced a search for his replacement.
During October 2003, the Company hired an interim financial and accounting
officer who immediately commenced procedures to assist in closing the books for
the third quarter ended September 30, 2003 and preparing the Company's financial
statements for filing with our quarterly report on Form 10-Q with the Securities
and Exchange Commission. In the process of closing the books for the third
quarter and preparing our financial statements for the three and nine months
ended September 30, 2003, the interim accounting officer discovered some facts
which led her to conclude that certain accounting errors had been made which
impacted reported historical financial results for the interim periods ended
March 31 and June 30, 2003. The errors initially identified were related to
certain liabilities that were not properly recorded primarily due to the timing
of recording liabilities and the recognition of gain from restructuring of
certain of the liabilities involved, the overstatement of certain prepaid
assets, and the recording of certain revenues which the interim accounting
officer could not reconcile with the information available.
These issues were immediately discussed with our management who promptly
notified the Audit Committee and our independent auditors of the errors
identified and initiated a comprehensive review of the accounting records to
determine the extent and magnitude of the accounting errors. Subsequent review
identified the additional error of the failure to recognize contributed services
by officers who had waived salaries during certain periods. Once these errors
had been identified and corrected, our accounting staff generated the financial
statements for the third quarter ended September 30, 2003 and restated financial
statements for the periods ended March 31 and June 30, 2003 which are included
in financial statement footnote 2 of the Company's 10Q for the periods ended
September 30, 2003.
Following the discovery of these accounting errors, the Company initiated a
number of improvements in our disclosure controls and procedures as well as our
internal controls, including internal control over financial reporting. Most of
these improvements were designed to reduce the opportunity for human error that
we believe was the primary cause of each of the identified errors. Management
has implemented strict procedures to ensure that all transactions are properly
18
recorded and documented through our accounting system and has instituted the
following review processes. Our CEO will review all journal entries outside of
normal recurring entries on a monthly basis and the Audit Committee will review
them on a quarterly basis. All division managers and/or the CEO will review
major revenue and expense items on a monthly basis with the accounting staff.
Additionally, we are in the process of establishing requirements for periodic
additional training for the accounting staff. The Company's financial officer
will spearhead the implementation and continued monitoring of these new
procedures and controls.
The Company maintains a system of disclosure controls and procedures that are
designed for the purposes of ensuring that information required to be disclosed
in our SEC reports is recorded, processed, summarized, and reported within the
time periods specified in the SEC rules and forms, and that such information is
accumulated and communicated to our management, including the Chief Executive
Officer as appropriate to allow timely decisions regarding required disclosure.
John McKowen, who serves as the Company's Chief Executive Officer and President,
after evaluating the effectiveness of the Company's disclosure controls and
procedures as defined in Exchange Act Rules 13a-14(c) as of December 31, 2003
(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 known to them by individuals within those entities, particularly
during the period in which this annual report was being prepared and that
information required to be disclosed in our SEC reports is recorded, processed,
summarized, and reported within the time periods specified in the SEC's rules
and forms. 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.
19
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 53 Chairman of the Board and Director
John R. McKowen 54 President, Chief Executive Officer
and Director
Louis F. Coppage 67 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 served as President, Chief Executive Officer and as a director
since our inception in 1993 through July 2003. Mr. Armiljo currently serves as
Chairman of the Board ,a director and as President of Swiftsure, Inc.. 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 that 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.
JOHN R. MCKOWEN has served as our President and Chief Executive Officer since
August of 2003 and as a Director since December 2002. He was the President of
Navidec Financial Services from November 2002 through July 2003. 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 became a director of the Company in December of 2002. 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 with an 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
20
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 $30M data storage
business based in Castle Rock, Colorado. He is a past officer and director of
several Colorado-based emerging public companies engaged in staffing services,
information technology, and other industries.
Section 16(a) Beneficial Ownership Reporting Compliance
Under U.S. securities laws, directors, certain executive officers and persons
holding more than ten percent (10%) of the Company's common stock must report
their initial ownership of the common stock and changes in that ownership to the
SEC. The SEC has designated specific due dates for those reports and the Company
must identify in this report those persons who did not file these reports when
due. Based solely on the Company's review of copies of the reports filed with
the SEC in the most recent fiscal year and written representations of its
directors and executive officers. Navidec believes that its current officers and
directors are in compliance with Section 16(a).
Code of Ethics
Due to restructuring of the Company and a change in management, the Company is
in the process of formulating, completing, and adopting a Code of Ethics that
applies to its principal executive officer, principal financial officer,
principal accounting officer, or other such persons that perform similar
functions on behalf of the Company.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth the annual compensation paid to Navidec's Chief
Executive Officer and other executive officers of Navidec, for the last three
fiscal years.
Annual Compensation Long Term Compensation
------------------------------------------------- ------------------------------------
Awards Payouts
-------------------------- -------
Restricted Securities
Name and Other annual stock Underlying LTIP All other
Principal Salary Bonus compensation award(s) Options/SAR's payouts compensation
Position Year ($) ($) ($) ($) ($) ($) ($)
- ------------------------------------------------------------------------------------------------------------------------------
John McKowen 2003 66,447 -- -- -- -- -- --
CEO, President (1) 2002 5,000 -- -- 250,000(3) -- -- --
2001 -- -- -- -- -- -- --
Ralph 2003 42,395 -- -- -- -- -- --
Armijo 2002 170,000 -- -- -- -- -- --
CEO (2) 2001 207,000 -- -- 11,000 -- -- --
21
(1) Mr. McKowen was President of Navidec Financial Services from November 2002
through July 31, 2003 when he became President and CEO of Navidec, Inc.
(2) Mr. Armijo served as President and CEO of Navidec, Inc. from inception
through July 31, 2003 when he became President of Swiftsure, Inc.
(3) The number indicated represents the number of shares of common stock
underlying stock options granted to Mr. McKowen during 2002.
(4) The number indicated represents the number of shares of common stock
underlying stock options granted to Mr. Armijo during 2001.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Navidec has issued no individual grants of stock options or stock appreciation
rights to Navidec's Chief Executive Officer or other executive officers during
2003.
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, 2003 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
Shares acquired unexercised in-the-money
on options/SARs at options/SARs at
Name exercise (#) Value Realized ($) fiscal year end (#) fiscal year end ($)
- -----------------------------------------------------------------------------------------------------------
Exercisable/ Exercisable/
unexercisable unexercisable (1)
- -----------------------------------------------------------------------------------------------------------
Ralph Armijo - - 10,735/228 (2) $ 12,345/$ 262
John McKowen - - 250,000/0 $ 0/$ 0
-----------------------------------------------------------------------------------------------------------
(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, 2003 and the exercise price of those options.
(2) Number reported in 2002 Form 10K was incorrect as it did not fully reflect
the effect of the reverse split of the Company's outstanding securities
that occurred on December 15, 2002.
DIRECTOR COMPENSATION
In 2003, Navidec's non-employee directors received $1,000 per Board meeting
attended in person and $500 for those attended by telephone. Members of the
Compensation Committee and Audit Committee receive $500 per meeting attended in
person and $250 for those attended by telephone. The Chairperson for the Audit
Committee will receive $1,000 per meeting attended in person and $500 for those
22
attended by telephone. Members of the Board of Directors will also receive
options to purchase 10,000 shares of common stock for their service on the
Board, 5,000 options for chairing the Compensation Committee, 2,500 options for
sitting on the Compensation Committee, 10,000 options for chairing the Audit
Committee, and 5,000 options for sitting on the Audit Committee. In addition,
one outside director was granted 100,000 options to purchase common stock for a
three-year commitment to serving on the board. These options will be issued when
Navidec adopts a new Stock Option Plan in April 2004.
EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN- CONTROL
ARRANGEMENTS
Navidec, Inc. entered an Employment Agreement with John McKowen, its President
and CEO ("CEO"), effective September 1, 2003. The term of that agreement is for
two years and renews automatically for successive additional one-year periods
provided that neither the CEO nor Navidec provide the other with notice of their
intent not to renew the agreement at least thirty (30) days before the
anniversary date of the agreement. The CEO's current annual salary under the
agreement is $90,000 and his salary is to be reviewed not less than monthly. The
agreement also provides that the CEO may be paid an annual bonus at the
discretion of the Board of Directors of the Company. In the event that CEO's
employment were to be terminated without "Cause" by Navidec, as defined in the
agreement, then Navidec must pay the CEO severance payments (the "Severance
Payments"). The Severance Payments will be an amount equal to six months of the
CEO's highest base salary in effect during the prior twelve months (either in a
lump sum or in monthly increments depending on the Company's financial status),
plus a pro rata amount of any annual bonus paid for the most recently completed
fiscal year. In addition, upon termination of the CEO, the Company will provide
the continuation of all of Benefits that the CEO is entitled to under Company
plans, as defined in the agreement, for one year and the immediate vesting of
all of the CEO's non-vested options for shares of Navidec's capital stock. If
the CEO's employment were terminated without Cause, including termination due to
a change in control, the CEO would receive $90,000. In February 2004, the Board
approved a temporary reduction in Mr. McKowen's salary to $5,000 per month until
the Company was doing better financially. They also agreed to reimburse Mr.
McKowen up to $500 for an auto lease and auto insurance and pay the full amount
for his health insurance coverage.
The CEO will also receive a finder's fee for merger and acquisition transactions
he introduces that are completed by the Company and is entitled to five percent
of net profits received by the Company from acquisitions and consulting
agreements he arranges.
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. In December 2003, the Board of
Directors of Navidec voted to exchange 600,000 options to purchase Navidec
common stock for all of the outstanding rights (approximately 25,000,000) to
purchase common stock of Navidec Financial Services, Inc. The exercise price of
these options is $1.30 and they are exercisable for 5 years. These options are
to be issued once Navidec has adopted a new stock option plan. These
transactions were not negotiated at arms' length as John R. McKowen controls
Interactive Capital and is a control person of Navidec as he serves as President
and CEO and director of the Company. Notwithstanding this, the Board of
Directors determined that the proposal was fair to all of the participants
including our shareholders.
Navidec entered into an Employment Agreement with Mr. Armijo effective September
1, 2003 to serve as President of Navidec Technology, Inc. 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 (30)
before the anniversary date of the agreement. Mr. Armijo's current annual salary
23
under the agreement is $0. This salary may be adjusted from time to time at the
discretion of Navidec's President but not less than monthly. The agreement also
provides that Mr. Armijo may be paid an annual bonus at the discretion of the
Board of Directors of the Company. Mr. Armijo will also receive a finder's fee
for merger and acquisition transactions he introduces that are completed by the
Company and he is also entitled to five percent of net profits received by the
Company from acquisitions and consulting agreements he arranges. 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 six months
salary at the highest base salary in effect during the twelve months (either in
a lump sum or in six monthly increments depending on the Company's financial
status), plus a pro rata amount of any annual bonus paid for the most recently
completed fiscal year prior to termination, plus the continuation of all of
"Benefits" that Mr. Armijo is entitled to under Company plans, as defined in the
agreement, for one year and the immediate vesting of all of Mr. Armijo's
non-vested options for shares of Navidec's capital stock.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Patrick Mawhinney, our former Chief Financial Officer, served as a member of
Navidec's Compensation Committee for the fiscal year ended 2002 and during his
employment in 2003.
The Board of Directors in its entirety acts as the Compensation Committee for
the Company. As such the Board of Directors conducted arm's length negotiations
with John McKowen prior to their offering and his acceptance of employment as
President of the Company.
AUDIT COMMITTEE
Lou Coppage, who serves as an Independent Director of the Company, also serves
as Chairman of the Audit Committee and acts as its financial expert.
COMPARATIVE STOCK PERFORMANCE
The following graph compares the cumulative total stockholder return on the
Company's Common Stock from February 12, 1997 (the date the Company's Common
Stock was first traded in a public market) through December 31, 2003 with the
cumulative total return on the NASDAQ Composite Index and the S&P 600 Small Cap
Index. The comparison assumes the investment of $100 on February 12, 1997 in the
Company's Common Stock and in each of the indices and, in each case, assumes
reinvestment of old dividends.
The comparisons in the graph below are based upon historical data and are not
indicative of, nor intended to forecase, future performance of the Company's
Common Stock.
(Graphic Omitted)
2/28/1997 12/31/1997 12/31/1998 12/31/1999 12/31/2000 12/31/2001 12/31/2002 12/31/2003
--------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Navidec 100 73.86 92.05 218.18 44.33 7.27 41.08 20.90
Nasdaq Composite 100 121.09 169.07 313.78 190.50 150.39 102.98 154.48
S&P 600 Small Cap 100 125.26 122.63 136.76 151.83 160.53 135.95 186.97
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of March 15, 2004, 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(1) Beneficially Owned Beneficial Ownership
------------------- -------------------- --------------------
Ralph Armijo 70,179 (2) 2.9%
Lou Coppage 100,000 (2) 4.0%
John McKowen 248,362 (2) 9.5%
All directors and
executive officers as
a Group (Three Persons) 418,541 15.4%
Charles Kirby 398,139 (3)(4) 15.3%
Jeffrey Ploen 272,758 (5) 10.5%
24
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. Included in this table are only
those derivative securities that have exercise prices which it is reasonable to
believe could be "in the money" within the next sixty days.
(1) Except as indicated herein, the business address for each person is 6399 S.
Fiddler's Green Circle, Suite 300, Greenwood Village, CO 80111.
(2) The number of shares indicated includes shares of common stock underlying
options that are currently exercisable, as of December 31, 2003 which are
held by the following persons in the amounts indicated: Mr. Armijo
(10,735); Mr. Coppage (100,000); and Mr. McKowen (200,000). Mr. Coppage's
options have been earned and will be issued when the Company adopts a new
Stock Option Plan in April 2004. Mr. McKowen's 200,000 options will be
issued pursuant to the exchange of Navidec Financial Services options for
options to purchase Navidec common stock when the Company adopts its new
Stock Option Plan in April 2004.
(3) Includes 77,000 shares held by Kirby Enterprises Fund, LLC and 121,139
shares and held by Kearney Holdings, LLC. Mr. Kirby is a control person of
both of these entities. Also includes 200,000 options that will be issued
to Mr. Kirby pursuant to the exchange of Navidec Financial Services options
for options to purchase Navidec common stock when the Company adopts its
new Stock Option Plan in April 2004.
(4) The business address for Mr. Kirby is 9072 South Copeland Street,
Littleton, CO 80126.
(5) Includes 200,000 options that will be issued to Mr. Ploen pursuant to the
exchange of Navidec Financial Services options for options to purchase
Navidec common stock when the Company adopts its new Stock Option Plan in
April 2004. Also includes 22,758 shares that are held by J. Paul Consulting
Corp, of which Mr. Ploen is a control person.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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
25
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 $85,000 with
Mr. John McKowen, who is currently President, CEO and $40,000 with Mr. Ralph
Armijo, formerly President and CEO and currently a Director and President of
Swiftsure, Inc. On June 9, 2003 the all of the Holders converted and the Company
issued 138,889 shares of Common Stock and 3,352 shares for accrued interest. In
total Mr. McKowen and Mr. Armijo received 69,444 shares of common stock and
1,676 shares for accrued interest through the conversion of their debentures.
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. In December
2003, the Board of Directors of Navidec voted to exchange 600,000 options to
purchase Navidec common stock for all of the outstanding rights (approximately
25,000,000) to purchase common stock of Navidec Financial Services, Inc. The
exercise price of these options is $1.30 and they are exercisable for five
years. These options are to be issued once Navidec has adopted a new stock
option plan.
In October of 2003, the Company made a $200,000 investment in the Kirby
Enterprise Fund (the Fund) for which a control person is also a person of
beneficial ownership in the Company. The Fund is a limited liability company
organized to invest in the equities security markets. At December 31, 2003 the
Company owned approximately 5% of the Fund.
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. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
AUDIT FEES
The aggregate fees billed by Hein & Associates LLP for professional services
rendered for the audit of our annual financial statements and review of
financial statements included in our Form 10-K's or services that are normally
provided in connection with statutory and regulatory filings were $65,420 for
fiscal year 2003 and $7,449 for fiscal year 2002.
26
TAX FEES
The aggregate fees billed by Hein & Associates LLP for professional services
rendered for tax compliance, tax advice and tax planning were $5,405 for fiscal
year 2003, and $0 for fiscal year 2002.
ALL OTHER FEES
In fiscal 2003, Hein & Associates LLP fees billed for other services were
$3,055. In fiscal 2003, Hein & Associates LLP fees billed for other services
were $0.
27
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, 2001 and 2002 Consolidated
Statements of Operations for the years ended December 31, 2000, 2001, and 2002
Consolidated Statements of Shareholders' Equity for the years ended December 31,
2000, 2001, and 2002 Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 2001, and 2002 Notes to Consolidated Financial Statements
3.1 Second Amended and Restated Articles of Incorporation of Navidec, Inc.
(1)
3.2 Amended and Restated Bylaws of ACI Systems, Inc.(2)
3.3 Articles of Merger and Agreement and Plan of Merger Between ACI Systems,
Inc. and Interactive Planet, Inc.(2)
4.1 Form of Certificate for Common Stock of Navidec.(2)
10.1 Navidec's Stock Option Plan.(3)
10.2 Form of Confidentiality and Non-Disclosure Agreement between Navidec
and its significant technical employees.(2)
10.3 Employment Agreement between Navidec and Ralph Armijo dated March 9,
2000.(1)
10.6 Stock and Note Purchase Agreement dated as of July 23, 1999 by and
between the Company and WFC Holdings Corporation.(4)
10.7 Form of Note of the Company payable to the order of WFC Holdings
Corporation.(4)
10.8 Form of Registration Rights Agreement by and between the Company and WFC
Holdings Corporation.(4)
10.9 John R. McKowen Employment Agreement. (6)
10.10 Interactive Capital Rights Agreement. (6)
10.11 Form of Class A Warrant to Purchase Common Stock. (5)
10.12 Form of Class B Warrant to Purchase Common Stock. (5)
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes - Oxley Act of 2002. Filed herewith.
32.1 Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant
to Section 906 of the Sarbanes - Oxley Act of 2002. Filed herewith.
(1) Incorporated by reference from the like numbered exhibit to Navidec's
Annual Report on Form 10-K for the year ended December 31, 2000.
(2) 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).
28
(3) Incorporated by reference from Navidec's Preliminary 14/A filed May 13,
1998.
(4) Incorporated by reference from Navidec's Form 8-K filed July 29, 1999.
(5) Incorporated by reference from Navidec's Quarterly Report on Form 10-Q for
the quarter ended September 30, 2003.
(6) Incorporated by reference from Navidec's Form S-3/A filed on April 1, 2003.
(b) Reports on Form 8-K
Report on Form 8-K filed December 17, 2003.
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: April 11, 2004 By: /s/ John McKowen
- --------------------- -------------------
John McKowen
President,
Chief Executive Officer,
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, the
following persons on behalf of the registrant and in the capacities and on the
dates indicated have signed this report below. This report may be signed in
multiple identical counterparts all of which, taken together, shall constitute a
single document.
Dated: April 11, 2004 By: /s/ John McKowen
--------------------- --------------------
John McKowen
President, Chief Executive Officer and Director
Dated: April 11, 2004 By: /s/ J. Ralph Armijo
--------------------- -----------------------
J. Ralph Armijo
Chairman and Director
Dated: April 11, 2004 By: /s/ Louis F. Coppage
--------------------- ------------------------
Louis F. Coppage
Director
29