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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended December 31, 1998
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ____________ to _________.
Commission File Number 0-22718
ZAMBA CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 41-1636021
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
7301 OHMS LANE, SUITE 200, MINNEAPOLIS, MINNESOTA 55439
(Address of Principal Executive Offices, including Zip Code)
Registrant's Telephone Number, Including Area Code: (612) 832-9800
Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
THE AGGREGATE MARKET VALUE OF VOTING STOCK HELD BY NON-AFFILIATES OF THE
REGISTRANT WAS APPROXIMATELY $54,114,338 BASED ON THE CLOSING SALE PRICE OF THE
COMPANY'S COMMON STOCK AS REPORTED ON THE NASDAQ NATIONAL MARKET ON MARCH 15,
1999:
THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK, AS OF MARCH
15, 1999: 29,017,952 SHARES.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Proxy Statement for the Annual Meeting of Stockholders to
be held on May 20, 1999, are incorporated by reference into Part III of
this report.
1
PART I
DISCLAIMER REGARDING FORWARD-LOOKING INFORMATION
Certain statements in this report are "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 and involve
known and unknown risks, uncertainties and other factors that may cause the
Company's actual results, performance or achievements to be materially different
from the results, performance or achievements expressed or implied by the
forward looking statements. Factors that impact such forward looking statements
include, among others, the growth rate of the customer care marketplace, the
ability of our partners to maintain competitive products, our ability to develop
skills in implementing customer care packages from additional partners, the
impact of competition and pricing pressures from actual and potential
competition with greater financial resources, our ability to obtain large-scale
consulting services agreements, changes in expectations regarding the
information technology industry, our ability to hire and retain competent
employees, possible changes in collections of accounts receivable, changes in
general economic conditions and interest rates, and other factors identified in
the Company's filings with the Securities and Exchange Commission.
ITEM 1. BUSINESS
Zamba Corporation ("Zamba" or the "Company") is a consulting and systems
integration company focused exclusively on the customer care market. Zamba is
committed to improving our clients' ability to care for their customers through
the use of innovative business practices and by leveraging package application
software. Our services include strategy development, business process alignment
and improvement, systems deployment, and systems support. Our goal is to assist
our clients in building lasting relationships with their customers, increase the
effectiveness of their customer service and sales operations, and improve
overall communication with their customers. Our customer care services include
the design, implementation and integration of several enterprise level
applications to facilitate sales automation, call center management, marketing
automation, and automated field service and sales. We offer our clients
end-to-end assistance with their implementations, including business case
evaluation, system planning and design, software implementation, modification
and development, training, installation, change management, network management,
and on-going support. Typically, we provide our services on a fixed-bid,
fixed-time basis, but we also perform some services on a time-and-expenses
basis. Under either method, our approach involves a rapid and iterative
methodology that requires significant client involvement.
Historically, the Company derived a substantial amount of its revenue from sales
of proprietary hardware and software that originally enabled data communication
over specialized mobile radio ("SMR") technology and, eventually, most types of
wireless networks. During 1996, the Company began a process to expand the
services it could offer to its clients by becoming a systems integrator focused
on wireless data communication and ceased production of its proprietary
hardware. During 1997, the Company reduced its workforce from approximately 95
employees to approximately 40 employees; consolidated and closed several
facilities; and reduced the carrying value of certain assets no longer expected
to be used in operations. As a result of these actions, the Company recorded
one-time charges totaling approximately $1.90 million during the third quarter
of 1997. The Company took these actions because of slower than expected market
and related revenue growth. Also, during the second half of 1997 and throughout
1998, the Company broadened its sales focus to providing systems integration
services for customer care including Sales Force Automation, Customer Support,
Marketing, Field Service & Sales Automation, and Call Centers.
In September 1998, the Company completed the acquisition of the QuickSilver
Group, Inc. ("QuickSilver"), a customer care consulting company specializing in
software package implementation for call center management, sales automation,
marketing automation, and automated field service and sales. This acquisition
enabled the Company to expand its consulting and systems integration
capabilities and geographic presence.
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In September 1998, the Company also annonuced the formation of NextNet, Inc., by
transferring its patented "NextNet" wireless data technology to an entity of
the same name, in conjunction with the receipt by that entity of $8 million in
private investment capital to fund the further development of the technology.
THE CUSTOMER CARE MARKET
Customer care is a subset of the package application software market. Reports
published by Forrester Research project the packaged application software market
to grow at a cumulative average growth rate ("CAGR") of 27%. Within this
market, the Company's segment is the implementation of packaged application
software for customer care solutions. The market for customer care
implementation is directly related to software-licensing activities. The
GartnerGroup anticipates that software-licensing revenue for customer care will
grow at a CAGR of 54%. The Company estimates that for every $1 of
software-licensing revenue, an additional $1 to $4 is spent on implementation,
training and consulting.
CUSTOMER CARE...THE ZAMBA APPROACH
Historically, companies have organized their business processes to ensure
efficient Enterprise Resource Planning. With this model, all front-office
functions that interact with the customer are disconnected, operating as
separate entities. Because the company is not operating as a unified whole with
a single face to the customer, customer confusion and an unsatisfactory customer
experience may result. Customer care practiced by Zamba helps companies put
their customers at the center of how the company organizes their business
processes and conducts its front office functions. The Zamba model calls for
companies to focus on achieving longer-term customer loyalty rather than only
short-term operational efficiencies. The objective is to give customers what
they deserve: to work with a company that at any given moment understands their
comprehensive history with the company and anticipates their needs. To
accomplish this radical transformation in customer care, Zamba consultants are
skilled in what the market refers to as front office applications, including
Sales Force Automation, Customer Support, Marketing, Field Service & Sales
Automation, and Call Centers.
SERVICES
Zamba delivers integrated customer care solutions quickly. Unlike traditional
consulting firms, which typically focus on customer "management" and measure
success in terms of short-term operational efficiency improvements, Zamba is
focused on deploying integrated customer care solutions and measures success in
terms of longer-term customer loyalty improvements and specific, measurable
business results.
Zamba offers the following services to its customers:
OPPORTUNITY ASSESSMENT
We assess our customers' current customer care performance against our
Competitive Assessment Model, a comprehensive set of benchmark data from
industry leaders. Following the assessment, a suggested plan for benefit
and value realization is developed and delivered.
BUSINESS CASE DEVELOPMENT
We provide our customers with a detailed financial and strategic
quantification of the value and return of the customer care opportunity.
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SOLUTION DEPLOYMENT
Using a fast, iterative approach to system implementation, we assist our
customers with deploying customer care solutions quickly so they begin to
receive high-impact business benefits immediately.
SOLUTION SUPPORT
Following the deployment of a customer care solution, the Zamba support
team will provide on-going technical and system support.
THE ZAMBA SOLUTION
- Help companies understand what opportunities they have to improve
customer care to positively improve customer loyalty
- Help companies determine the best strategy and plan for seizing those
opportunities
- Design and implement an integrated solution that takes full advantage
of industry-leading commercial software packages -- quickly,
effectively and with an unconditional guarantee
- Enhance the solutions we provide with ongoing innovation, change, and
support
CUSTOMERS
Zamba has a history of working with some of the most competitive, leading-edge
companies in the United States. Our customers have embraced Zamba's
results-oriented approach, reputation, and ability to deliver on-time, on-budget
solutions.
Zamba has implemented more than 75 customer care solutions for industry-leading
companies such as Ameritech Corporation, Bay Networks, Cisco Systems, 3-Com,
Compaq, Compucom, Hertz, Hewlett-Packard, Honeywell, MCI, Progressive Insurance,
Symbol, Qualcomm, Wang Global and Xerox, among others.
The Company has in the past, and may in the future, derive a significant portion
of its revenue from a relatively small number of clients. In 1998, two
customers each represented at least 10% of the Company's revenue: Hertz (17.7%)
and Compucom (11.3%).
SALES AND MARKETING
The Company has a dedicated sales and marketing organization to market and sell
its services. The business development team is chartered with building market
awareness of the Company's offerings, establishing partnerships with the
appropriate hardware, software and consulting vendors, and building a pipeline
of demand for our service solutions. The organization consists of 8 employees
operating throughout the United States. At any given time, numerous Zamba
professionals and senior practice leaders are active in the development of new
business. The coordination of their efforts and tracking of their results is
critical to Zamba's ability to forecast and adequately staff future work.
COMPETITION
The systems integration market is highly competitive and served by numerous
national, regional and local firms. The market includes participants from a
variety of market segments, including systems consulting and integration firms,
contract programming companies, application software firms, the professional
services groups of software companies and "Big Five" accounting firms. Primary
competitors in the customer care market include practices within Technology
Solutions Corporation, Sapient Corporation, and Cambridge Technology Partners.
The Company also faces competition from information services organizations
within potential clients. The Company believes
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that the principal competitive factors in the systems integration industry
include technical expertise, responsiveness to client needs, speed in delivering
solutions, quality of service and perceived value. The Company also believes
that its ability to compete depends in part on a number of competitive factors
outside its control, including the ability of its competitors to hire, retain,
and motivate employees, the price at which other companies offer comparable
services, and the extent of its competitors responsiveness to customer needs.
Many of the Company's direct, indirect and potential future competitors have
financial, technical, marketing, sales, distribution and other resources
substantially greater than those of the Company. Some of these competitors have
established market positions, greater name recognition, substantial
technological capabilities and generate greater consulting revenues than does
the Company. The Company faces competition not only from these established
companies, but also from start-up companies that have a niche expertise in
specific application technologies.
The competitive environment could adversely affect the Company's business,
results of operations, and financial condition.
EMPLOYEES
The Company's success depends to a significant degree upon the continued
contributions of its key management, sales and technical personnel. The
Company's success also depends upon its ability to attract and retain highly
qualified personnel. Competition for such personnel is intense, and there can
be no assurance that the Company will be successful in hiring or retaining
qualified personnel.
As of December 31, 1998, the Company had 95 full-time employees, consisting of
72 individuals in the professional staff, 15 in administrative roles and 8 in
business development.
The employees and the Company are not parties to any collective bargaining
agreements, and the Company believes that its relations with its employees are
good.
PRODUCT DEVELOPMENT
As noted earlier, Zamba is a systems integration consulting company, and as
such, derives a majority of its revenues from third party products instead of
from sales of its own products. However, the Company has legacy products from
our years developing wireless mobile data technology.
COMMUNICATIONS SOFTWARE
The Company's wireless technologies include its KeyWare-Registered Trademark-
middleware technology and other standard commercial software developed by the
Company, such as database interface software, as well as application software
customized by the Company for individual clients. The Company's technology also
includes certain network management software tools that the Company has
developed in order to identify and diagnose problems arising with clients'
wireless network configurations.
KeyWare was introduced to the market in the first quarter of 1995. KeyWare is a
wireless networking software product referred to as "middleware," and is built
upon an open client/server architecture. In the third quarter of 1997, the
Company decided to no longer sell KeyWare as a stand-alone product. Instead,
the Company sells KeyWare only to existing clients.
OTHER TECHNOLOGY
On September 21, 1998, the Company transferred its patented "NextNet" wireless
data technology to an entity of the same name, in conjunction with the receipt
by that entity of $8 million in private investment capital to fund the further
development of the technology. In concept, the NextNet technology will enable
high-speed data transmission over existing cellular infrastructures at rates
5
not possible with existing systems. The Company received forty-four percent
(44%) ownership of NextNet, the new company, in exchange for the NextNet
technology. The Company's investment in NextNet is carried at $0, the
historical carrying basis of the technology transferred, as amounts incurred by
the Company up to the date of the transfer were charged to research and
development expense. The fourth quarter of 1998 was the first quarter in which
the Company did not incur expenses related to the development of the NextNet
technology. Several long-time employees, including two Vice Presidents, of the
Company also transferred to NextNet. These employees were previously engineers
who worked on KeyWare and our earlier computing devices for SMR.
For the years ended December 31, 1998, 1997, and 1996, the Company's research
and development expenses were approximately $1.16 million, $3.29 million, and
$4.21 million, respectively. The Company does not expect to have any research
and development costs in 1999, and does expect that clients will directly fund
product enhancements to KeyWare.
PROPRIETARY RIGHTS
The Company's success is dependent upon its software deployment and consulting
methodologies and other intellectual property rights. The Company relies upon a
combination of trade secret, nondisclosure and other contractual arrangements
and technical measures, and copyright and trademark laws, to protect its
proprietary rights. The Company generally enters into confidentiality
agreements with its employees, consultants, clients and potential clients and
limits access to, and distribution of its propriety information. There can be
no assurance that the steps taken by the Company in this regard will be adequate
to deter misappropriation of its propriety information or that the Company will
be able to detect unauthorized use and take appropriate steps to enforce its
intellectual property rights.
The Company's business includes the development of custom software applications
in connection with specific client engagements. Ownership of such software is
generally assigned to the client. In addition, the Company also develops
object-oriented software components that can be reused in software application
development and certain foundation and application software products, or
software "tools," most of which remain the property of the Company.
Although the Company believes that its services and products do not infringe on
the intellectual property rights of others, there can be no assurance that such
a claim will not be asserted against the Company in the future.
YEAR 2000 UPDATE
Year 2000 computer issues create risks for the Company. The full extent and
scope of such risks have not yet been fully assessed. In the event that internal
products and systems, or those products and systems provided or utilized by
third parties do not correctly recognize and process date data information
beyond the year 1999, material adverse effects on the Company's business,
operating results, and financial condition could result.
To address Year 2000 issues, the Company has initiated a program designed to
address the most critical Year 2000 items that would affect the Company's
products and the operations of the following functions: operations, finance,
sales, and human resources. The Company has not commenced work on contingency
plans to address potential problems with its internal systems or the systems of
its supplier and customers or other third parties.
In December 1998, the Company commenced a program to inventory, assess,
remediate, and test the Year 2000 capability of the Zamba software products. All
Zamba Year 2000 activities concerning the Company's current products are
expected to be completed by October 1999.
Other Year 2000 issues primarily consist of assessing the Year 2000 impact for
outside vendors, customers, and facilities. Project plans are being developed
and will include the process of identifying and prioritizing critical suppliers
and customers at the direct interface level, and
6
communicating with them about their plans and progress in addressing Year 2000
issues. Detailed evaluations of the most critical third parties have been
initiated. It is expected that all Year 2000 project plans and 1999 budgets will
be completed by the second quarter of 1999 and the remaining inventories
completed by the end of the second quarter of 1999. This effort will be followed
by each business function conducting a focused level of ranking and functional
assessment of its inventory to establish the methods and actions required to
resolve any Year 2000 issues discovered. The assessment efforts are estimated to
be completed by the second quarter of 1999. The remediation (modification or
replacement of existing software or systems) and the testing phases of the
project plans are expected to take place throughout most of 1999 and are
estimated to be completed, for all business critical items, by the fourth
quarter of 1999. All remaining issues (which are considered low priority or low
risk to the business) are planned to be addressed as time permits and could
continue through the first half of 2000.
The Company has spent nominal amounts to date and doesn't expect the total cost
associated with required modifications to become Year 2000 ready to be
significant or to have a material adverse effect on the Company's business,
operating results and financial condition. The Company's current estimates of
the amount of time and costs necessary to implement and test its systems are
based on the facts and circumstances existing at this time. New developments may
occur that could affect the Company's estimates for the required modifications
to become Year 2000 ready. These developments include, but are not limited to:
(a) the availability and cost of personnel trained in this area, (b) the ability
to locate and correct all relevant computer code and equipment, and (c) the
planning and modification success needed to achieve full implementation.
Readers are cautioned that the foregoing discussion regarding Year 2000 computer
issues contains forward-looking statements based on current expectations that
involve risks and uncertainties and should be considered in conjunction with the
following. The failure to correct a material Year 2000 problem could result in
an interruption in, or a failure of, certain normal business activities or
operations of the Company. Such failures could materially and adversely affect
the Company's business, operating results, and financial condition. Due in large
part to the uncertainty of the Year 2000 readiness of third-party suppliers and
customers, as well as the lack of a final Year 2000 project plan for the
remaining internal business systems that are not yet assessed as Year 2000
ready, the Company is currently unable to determine whether the consequences of
Year 2000 issues will have a material impact on the Company's business,
operating results or financial condition. The Company's programs addressing Year
2000 computer issues are expected to reduce the Company's level of uncertainty
regarding Year 2000 issues and, in particular, about the Year 2000 readiness of
its material internal operations, suppliers, customers, and other third-parties.
In addition, the Company believes that the current Year 2000 activities
surrounding the Company's software products and internal systems have reduced
the risk of any disruption caused by any Year 2000 issues in these areas.
ITEM 2. PROPERTIES
The Company's headquarters consists of approximately 10,451 square feet located
in a multi-story building in suburban Minneapolis, Minnesota. The facility is
leased pursuant to an agreement that expires in August 2000. The Company also
maintains offices and leases space for operations and sales functions in
Cupertino and Pleasanton, California, and Boston, Massachusetts of 7,923, 4,905
and 3,942 square feet, respectively. The Company believes that its facilities
are adequate to meet its anticipated level of operations for the near term. For
additional information concerning the Company's lease obligations, see Note 3 to
the Company's consolidated financial statements included in this Annual Report
on Form 10-K.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation relating to claims
arising out of its operations in the normal course of business. The Company is
not currently involved in any legal proceedings the resolution of which, in
management's opinion, would have a material adverse effect on the Company's
business, financial position or results of operations.
7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company conducted a ballot of its shareholders by written consent to amend
the Company's Certificate Incorporation to increase the authorized number of
shares of Common Stock of the Company from 35,000,000 to 55,000,000. The ballots
were tabulated on December 29, 1998, and shareholders approved the increase,
with 24,455,072 votes cast in favor of the increase, 544,376 votes cast against,
8,228 abstentions, and no broker non-votes.
8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock began trading on December 10, 1993, on the Nasdaq
National Market under the symbol "RACO," in connection with its initial public
offering. On October 5 1998, the Company changed its corporate name to Zamba
Corporation. As a result of this name change, the Company's Common Stock began
trading on the Nasdaq National Market under the symbol "ZMBA."
A summary of the range of high and low closing prices for the Company's Common
Stock for the each quarterly period in the two most recent fiscal, is presented
below. These prices reflect interdealer prices and do not include retail
markups, markdowns or commissions.
HIGH LOW
- --------------------------------------------------------------------------------
1997
First Quarter $ 4.88 $ 3.25
Second Quarter 3.50 2.13
Third Quarter 2.63 1.50
Fourth Quarter 2.06 1.00
1998
First Quarter $ 4.06 $ 1.31
Second Quarter 4.06 2.63
Third Quarter 3.19 1.56
Fourth Quarter 3.19 1.50
The Company has never paid cash dividends on its capital stock and does not
anticipate declaring or paying any cash dividends in the foreseeable future.
The Company intends to retain future earnings, if any, for the development of
its business.
As of March 8, 1999, the Company had 3,407 stockholders of record.
In connection with the acquisition of QuickSilver on September 22, 1998, the
Company issued 2,337,980 shares of unregistered Company Common Stock to the
shareholders of QuickSilver, as partial consideration for receipt by the Company
of all of the common stock of QuickSilver. These shares were subsequently
registered on November 24, 1998. The Company also issued deferred promissory
notes to the QuickSilver shareholders with an aggregate principal value of $2.16
million. These notes are convertible into Company Common Stock at the option of
the holder and with the consent of the Company's Board of Directors. The
conversion ratio for the notes is determined by the average closing price of the
Company's Common Stock on the Nasdaq National Market for the twenty days
preceding the conversion request. On December 30, 1998, $1.2 million of the
notes were converted to Common Stock, in addition to $19,000 of interest payable
related to such notes.
On October 26, 1998, the Chairman of the Board of the Company, Joseph D.
Costello, purchased 1,000,000 shares of unregistered Series A Preferred Stock
from the Company for the purchase price of $2.00 per share, or a total price of
$2,000,000. The shares of Preferred Stock converted by their terms into Common
Stock on December 29, 1998, when the Company's shareholders approved increasing
the authorized number of Common Stock shares outstanding. Proceeds from the
sale of the Preferred Stock will be used to fund general corporate activities.
9
ITEM 6. SELECTED FINANCIAL DATA.
CONSOLIDATED STATEMENTS OF OPERATIONS DATA (for the years ended December 31)
(In thousands, except per share data)
1998 1997 1996 1995 1994
----------------------------------------------------------------------------------
Net revenues:
Services $7,771 $ 4,744 $ 4,977 $ 2,790 $ 847
Products 350 876 1,906 3,298 3,106
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenues 8,121 5,620 6,883 6,088 3,953
Cost and expenses:
Cost of services 4,835 4,227 3,499 1,314 370
Cost of products 9 1,266 2,027 3,001 2,953
Research and development 1,163 3,286 4,211 4,170 3,035
Sales and marketing 2,209 4,149 6,249 9,045 7,647
General and administrative 1,895 2,463 2,000 2,240 2,920
Amortization of intangibles 936 0 0 0 0
- -----------------------------------------------------------------------------------------------------------------------------------
Loss from operations (2,926) (9,771) (11,103) (13,682) (12,972)
Other income, net 179 427 859 1,335 1,447
- -----------------------------------------------------------------------------------------------------------------------------------
Net loss ($2,747) ($9,344) ($10,244) ($12,347) ($11,525)
- -----------------------------------------------------------------------------------------------------------------------------------
Net loss per share - basic and diluted ($0.11) ($0.37) ($0.42) ($0.52) ($0.49)
Weighted average common shares outstanding 25,712 24,932 24,372 23,765 23,443
CONSOLIDATED BALANCE SHEET DATA (as of December 31)
(In thousands)
1998 1997 1996 1995 1994
----------------------------------------------------------------------------------
Cash and cash equivalents and short-
term investments $2,962 $5,336 $11,947 $15,042 $27,407
Working capital 4,116 5,132 12,693 16,781 29,486
Total assets 13,941 7,237 16,919 27,116 38,070
Total stockholders' equity 11,122 6,277 15,381 25,378 36,613
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
Zamba is a national customer care consulting company. Our services are designed
to assist clients in building lasting relationships with customers, increase the
effectiveness of customer service and sales operations, and improve overall
communication with customers. We deliver our services using a unique
combination of accumulated expertise in the customer care field, existing
technology, and client knowledge. Typically, we perform our services on a
fixed-bid, fixed-timetable basis. Rapid development and significant client
involvement are key aspects to our methodologies. We offer our clients
end-to-end assistance with their implementations, including business case
evaluation, system planning and design, software implementation, modification
and development, training, installation, change management, network management,
and on-going support. Our
10
services include the design, implementation and integration of several
enterprise level applications to facilitate sales automation, call center
management, marketing automation and automated field service and sales.
The Company currently derives most of its revenue from systems integration
services including business case evaluation, system planning and design,
software package implementation, custom software development, training,
installation and change management. The Company also derives recurring revenue
from providing post implementation support.
The Company's revenues and earnings may fluctuate from quarter to quarter based
on the number, size and scope of projects in which the Company is engaged, the
contractual terms and degree of completion of such projects, any delays incurred
in connection with a project, employee utilization rates, the adequacy of
provisions for losses, the accuracy of estimates of resources required to
complete ongoing projects, and general economic conditions and other factors. In
addition, revenues from a large client may constitute a significant portion of
the Company's total revenues in a particular quarter.
Historically, the Company derived a substantial amount of its revenue from sales
of proprietary hardware and software that originally enabled data communication
over specialized mobile radio ("SMR") technology and, eventually, most types of
wireless networks. During 1996, the Company began a process to expand the
services it could offer to its clients by becoming a systems integrator focused
on wireless data communication and ceased production of its proprietary
hardware. During 1997, the Company reduced its workforce from approximately 95
employees to approximately 40 employees; consolidated and closed several
facilities; and reduced the carrying value of certain assets no longer expected
to be used in operations. As a result of these actions, the Company recorded
one-time charges totaling approximately $1.90 million during the third quarter
of 1997. The Company took these actions because of slower than expected market
and related revenue growth. Also, during the second half of 1997 and throughout
1998, the Company broadened its sales focus to providing systems integration
services for customer care including Sales Force Automation, Customer Support,
Marketing, Field Service & Sales Automation, and Call Centers.
KEY FINANCIAL TRANSACTIONS
On September 22, 1998, the Company completed the acquisition of the QuickSilver
Group, Inc. ("QuickSilver"), a customer care consulting company specializing in
software package implementation for call center management, sales automation,
marketing automation, and automated field service and sales. QuickSilver's
operating results are included in our operating results from September 22, 1998.
For additional information concerning the Company's acquisition of QuickSilver,
see Note 4 to the Company's consolidated financial statements included in this
Annual Report on Form 10-K.
On September 21, 1998, the Company transferred its patented "NextNet" wireless
data technology to an entity of the same name, in conjunction with the receipt
by that entity of $8 million in private investment capital to fund the further
development of the technology. In concept, the NextNet technology will enable
high-speed data transmission over existing cellular infrastructures at rates not
possible with existing systems. The Company received forty-four percent (44%)
ownership of NextNet, the new company, in exchange for the NextNet technology.
The Company's investment in NextNet is carried at $0, the historical carrying
basis of the technology transferred, as amounts incurred by the Company up to
the date of the transfer were charged to research and development expense. The
fourth quarter of 1998 was the first quarter in which the Company did not incur
expenses related to the development of the NextNet technology. Several
long-time employees of the Company also transferred to NextNet. These employees
were previously engineers who worked on KeyWare and our earlier computing
devices for SMR.
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On October 26, 1998, the Company issued 1 million shares of convertible Series A
Junior Participating Preferred Stock to our Chairman, Joe Costello, for the
purchase price of $2 million. The convertible Preferred Stock automatically
converted to common stock on a 1-to-1 basis upon the approval of the Company's
shareholders on December 29, 1998, to authorize an additional 20 million shares
of Common Stock.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998, COMPARED TO YEAR ENDED DECEMBER 31,1997
NET REVENUES
Net revenues increased 44% to $8.12 million in 1998 compared to $5.62 million in
1997, due principally to Company's transition to the sale of its system
integration services instead of selling stand-alone software products and the
acquisition of QuickSilver on September 22, 1998. As a result of the shift in
focus, services revenues increased to $7.77 million in 1998 from $4.74 million
in 1997 and product revenues decreased to $350,000 in 1998 from $876,000 in
1997. The Company expects to grow revenues at a similar if not greater rate in
1999. Product revenues should continue to decline.
COST OF REVENUES
Cost of revenues consists primarily of payroll and payroll related expenses for
personnel dedicated to client assignments and is directly associated with, and
varies with, the level of client services being delivered. Cost of revenues
were $4.84 million or 60% of revenues in 1998 compared to $5.49 million, or 98%
of net revenues in 1997. The dollar and percentage decrease resulted from the
cost reduction efforts in the third quarter of 1997, which significantly reduced
the number of employees and related expenses for most of 1998. Although the
cost of revenue decreased from 1997 compared to 1998 because of the 1997 cost
reduction efforts, due to the acquisition of QuickSilver on September 22, 1998,
project personnel headcount increased 160% to 65 at December 31, 1998, from 25
employees at December 31, 1997. While the Company expects to meet its hiring
goals in 1999, competition for personnel with information technology skills is
intense and the Company expects salaries and wages to continue to increase. The
Company periodically reviews and updates its billing rates to cover the expected
increase in costs.
RESEARCH AND DEVELOPMENT
Research and development expenses were $1.16 million or 14% of net revenues in
1998 compared to $3.29 million or 58% of net revenues in 1997. The dollar and
percentage decrease is due primarily to the decrease in research and development
personnel which occurred as a result of discontinuing any product development or
enhancements of the KeyWare product line throughout 1998, and the transfer of
the NextNet technology in September of 1998 to an entity of the same name
described in the Key Financial Transactions section in Item 7. The Company
anticipates no research and development expenses in 1999.
SALES AND MARKETING
Sales and marketing expenses were $2.21 million or 27% of net revenues in 1998
compared to $4.15 million or 74% of net revenues in 1997. The dollar and
percentage decrease resulted from the cost reduction efforts made by the Company
in the third quarter of 1997 which significantly reduced the number of employees
and related expenses for sales and marketing in 1998. In connection with the
Company's focus on systems integration services, a charge of approximately
$202,000 was recorded in the third quarter of 1997 for severance and facility
consolidation costs in the sales and marketing area. The Company anticipates
sales and marketing expenses to increase in 1999.
12
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $1.90 million or 23% of net revenues in
1998 compared to $2.46 million or 44% of net revenues in 1997. The dollar and
percentage decrease resulted from the cost reduction efforts made by the Company
in the third quarter of 1997 that significantly reduced the number of employees
and related expenses for 1998. As the Company grows and expands geographically
in 1999, it anticipates general and administrative expenses to increase.
AMORTIZATION OF INTANGIBLES
Intangible asset amortization expense in 1998 was $936,000 compared to $0 in
1997. The increase is due to the acquisition of QuickSilver on September 22,
1998. The acquisition was accounted for using the purchase method of
accounting. The purchase price was allocated to tangible and identifiable
intangible assets. The fair value of the identifiable intangible assets
acquired was $7.70 million and was recorded in the following categories: people
and experiences, client references, client lists, and intellectual property and
delivery methodology. These amounts are being amortized over the economic
useful lives of between two and four years.
INTEREST INCOME
Interest income was $225,000 in 1998 compared to $427,000 in 1997. The decrease
is principally due to decreased cash and investment balances which were used to
fund operating activities.
INTEREST EXPENSE
Interest expense in 1998 was $46,000 compared to $0 in 1997. The increase is
due to interest expense related to the notes payable issued in September 1998 in
connection with the acquisition of QuickSilver.
YEAR ENDED DECEMBER 31, 1997, COMPARED TO YEAR ENDED DECEMBER 31, 1996
NET REVENUES
Net revenues decreased 18% to $5.62 million in 1997 compared to $6.88 million in
1996 due principally to discontinuing the production, purchase and distribution
of SMR products. In 1997, the Company completed its exit from the SMR hardware
business and continued its transition to focusing on the sale of its system
integration services instead of selling stand-alone software products. As a
result of these decisions, product revenues decreased to $876,000 in 1997 from
$1.90 million in 1996. Additionally, the Company began to shift the focus of
its business from performing small, technical roles within larger projects to
providing its clients with management and implementation assistance for those
projects. These larger opportunities require longer sales development time than
do technical assistance, and the transition to this mode of sales required a
significant amount of time and attention from the Company's management and key
personnel.
COST OF REVENUES
Cost of revenues consists primarily of payroll and payroll related expenses.
Cost of revenues were $5.49 million or 98% of net revenues in 1997 compared to
$5.53 million or 80% of net revenues in 1996.
Cost of service revenues were $4.23 million and $3.50 million for the years
ended December 31, 1997, and 1996, respectively. The increases in costs
resulted primarily from the cost of recruiting personnel with the skills to
deliver large systems integration projects, and the transfer and utilization of
certain research and development and sales and marketing personnel into the
systems integration services group. The one-time charges recorded during the
third quarter of 1997 included approximately $211,000 of severance and related
costs associated with eliminating
13
personnel with specializations in areas no longer pertinent to the Company's
systems integration offerings.
Cost of product revenues were $1.27 million and $2.03 million for the years
ended December 31, 1997, and 1996, respectively. The decrease from 1996 to 1997
is primarily due to a $900,000 charge recorded in the first quarter of 1996,
resulting from the Company's decision to write down its remaining SMR hardware
inventories to their net realizable values at that time. The Company recorded
one-time charges in the third quarter of 1997, including approximately $425,000
relating to completing the Company's exit from SMR hardware production and
distribution.
RESEARCH AND DEVELOPMENT
Research and development expenses were $3.29 million or 58% of net revenues in
1997 compared to $4.21 million or 61% of net revenues in 1996. The dollar and
percentage decrease is due primarily to the focus on systems integration
services rather than product sales, resulting in a reduction of research and
development staff during the third quarter of 1997.
SALES AND MARKETING
Sales and marketing expenses were $4.15 million or 74% of net revenues in 1997
compared to $6.25 million or 91% of net revenues in 1996. The dollar and
percentage decrease is primarily related to payroll and payroll related
expenditures associated with the decrease in sales and marketing personnel. In
connection with the Company's focus on systems integration services, a charge of
approximately $202,000 was recorded in the third quarter of 1997 for severance
and facility consolidation costs in the sales and marketing area.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $2.46 million or 44% of net revenues in
1997 compared to $2.0 million or 29% of net revenues in 1996. The increase in
1997 is primarily due to approximately $803,000 of facility and relocation
charges recorded in the third quarter of 1997.
INTEREST INCOME
Interest income decreased to $427,000 in 1997 from $859,000 in 1996. This
decrease is principally due to decreased cash and investment balances which were
used to fund operating activities.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, the Company had no significant capital spending or
purchase commitments and had cash and cash equivalents totaling $2.96 million
and working capital of $4.12 million. For the years ended December 31, 1998,
and 1997 the Company used $2.35 million and $6.71 million respectively of cash
for operating activities and $2.1 million, net of cash acquired, for the
acquisition of QuickSilver. The amount of cash used in operating activities
during 1998 and 1997 decreased as a result of cost-reduction efforts made by the
Company in the third quarter of 1997 which significantly reduced the number of
employees and related expenses for 1998. The Company enhanced its cash position
on October 26, 1998, when we issued 1.0 million shares of Series A Junior
Participating Preferred Stock to our Chairman, Joe Costello, for the purchase
price of $2.0 million. These shares were converted to Common Stock on December
29, 1998. The Company believes its existing capital resources will be
suffucient to meet its capital requirements into 2000.
NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standard No. 133 "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133), effective in 2000,
establishes new standards for recognizing all derivatives as either assets or
liabilities, and measuring those instruments at fair value. At the
14
present time, the Company does not anticipate that SFAS No. 133 will have a
material impact on its financial position or results of operations.
FACTORS THAT MAY AFFECT FUTURE RESULTS
There can be no assurance that the Company's business will grow as anticipated
or that the Company will achieve or sustain profitability on a quarterly or
annual basis in the future. The Company derives a substantial part of its
revenues from a small number of clients whom, after evaluating the Company's
capabilities, decide whether to engage the Company to create business case
evaluations, consult on change management practices and, in some cases, to
design, implement and deploy their customer care systems. A decision by any one
of these clients to delay a customer care project may have a material adverse
effect on the Company's business and results of operations.
In order for the Company's revenues from consulting and integration services to
grow, the Company must continue to add more clients and larger projects to plan,
design and implement customer care systems. The Company's inability to obtain
clients for large-scale consulting and integration services could materially and
adversely affect the growth of its business.
In addition to the factors listed above, actual results could vary materially
from the foregoing forward-looking statements due to the Company's inability to
hire and retain qualified personnel, the risk that the Company may need to
enhance products and services beyond what is currently planned, the levels of
promotion and marketing required to promote the Company's products and services
so as to attain a competitive position in the marketplace, or other risks and
uncertainties identified in this Annual Report and the Company's other filings
with the SEC.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to certain market risks based on the outstanding
long-term debt obligations of $1.03 million at December 31, 1998. As
discussed in Note 5 to the consolidated financial statements, the interest
rate on the Company's long-term debt obligation is 7%, and the obligation
matures quarterly on an installment basis commencing in December 1999 and
ending in December 2003. The Company does not invest in any derivative
financial instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULE.
The following Financial Statements, Supplemental Schedule and Independent
Auditors' Report thereon are included herein (page numbers refer to pages in
this Report):
PAGE
Independent Auditors' Report for the year ended December 31, 1998 - KPMG Peat Marwick LLP 21
Report of Independent Accountants for the years ended December 31, 1997 and 1996 - PricewaterhouseCoopers LLP 22
Consolidated Balance Sheets as of December 31, 1998 and 1997 23
Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996 24
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996 25
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 26
Notes to Consolidated Financial Statements 27 - 35
Supplemental Schedule - Schedule II Valuation and Qualifying Accounts 36
15
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On January 25, 1999, PricewaterhouseCoopers LLP ("PwC") resigned as the
Company's independent accountants, because the Company intended to enter into a
business relationship with the technology consulting practice of PwC.
Subsequently, the Company has entered into a formal business relationship with
PwC. The reports of PwC on the financial statements of the Company for the
years ended December 31, 1997, and 1996, did not contain an adverse opinion or a
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope, or accounting principles. In connection with the audits of the
Company's financial statements for the years ended December 31, 1997, and 1996,
and through January 25, 1999, there were no "reportable events" as that term is
described in Item 304(a)(1)(v) of Regulation S-K, and there were no
disagreements between the Company and PwC on any matters of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of PwC would
have caused PwC to make reference to the matter in their reports on the
financial statements for such years.
On February 8, 1999, the Audit Committee of the Board of Directors of the
Company approved the retention of KPMG Peat Marwick LLP ("KPMG") to be the
Company's new independent accountants. During the two fiscal years ended
December 31, 1997, and December 31, 1998, and for the interim period through
February 8, 1999, the Company did not seek advice from KPMG regarding (i) the
application of accounting principles to a specified transaction or the type of
audit opinion that might be rendered on the Company's financial statements; or
(ii) any matter that was either the subject of a disagreement, as defined in
paragraph (a)(1)(iv) of Item 304 of Regulation S-K or a reportable event, as
described in paragraph (a)(1)(v) of Item 304 of Regulation S-K.
The resignation of PwC and retention of KPMG were reported on 8-K filings with
the Securities and Exchange Commission on January 26, 1999, and February 12,
1999, respectively.
16
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information concerning the Company's directors and executive officers and
compliance with Section 16(a) required by this item is contained in the sections
entitled "Nominees" in Proposal No. 1, "Executive Officers" and "Section 16(a)
Beneficial Ownership Reporting Compliance," appearing in the Company's Proxy
Statement to be delivered to stockholders in connection with the Annual Meeting
of Stockholders to be held on May 20, 1999 ("Proxy Statement"). Such
information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is contained in the sections entitled
"Director Compensation" in Proposal No. 1, "Executive Compensation," and
"Compensation Committee Interlocks and Insider Participation," appearing in the
Company's Proxy Statement. Such information is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is contained in the section entitled
"Security Ownership of Certain Beneficial Owners and Management" appearing in
the Company's Proxy Statement. Such information is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is contained in the section entitled
"Certain Transactions" appearing in the Company's Proxy Statement. Such
information is incorporated herein by reference.
17
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K.
(a)(3) and (c) Exhibits
3.01 Registrant's Fourth Amended and Restated Certificate of
Incorporation (12)
3.02 Certificate of Designation specifying the terms of the Series A
Junior Participating Preferred Stock of the Registrant as filed
with the Delaware Secretary of State on September 14, 1994 (3)
3.03 Registrant's Bylaws, as amended (3)
4.01 Form of specimen certificate for Registrant's Common Stock (1)
4.02 Rights Agreement dated September 12, 1994 between the Registrant
and Norwest Bank Minnesota, N.A., as Rights Agent, which includes
as exhibits thereto the form of rights certificate and the
summary of rights to purchase preferred shares (3)
10.01** Registrant's 1989 Stock Option Plan, as amended, and related
documents (1)
10.02** Registrant's 1993 Equity Incentive Plan and related documents, as
amended through January 10, 1998
10.03** Registrant's 1993 Directors Stock Plan, as amended, and related
documents, as amended through November 14, 1995 (5)
10.04** Registrant's 1994 Officer's Option Plan (4)
10.05 1997 Stock Option Plan for Key Employees, Consultants and
Directors of QuickSilver Group, Inc. (10)
10.06** Registrant's 1998 Non-Officer Stock Option Plan (8)
10.07 Form of Indemnification Agreement entered into by the Registrant
and each of its directors and executive officers (1)
10.08 Lease Agreement by and between the Registrant and Connecticut
General Life Insurance Company dated May 2, 1994, for premises at
7301 Ohms Lane, Edina, MN 55439 (2)
10.09** Letter agreement by and between Registrant and Steve Swantek
dated April 9, 1997 (6)
10.10** Letter agreement by and between Registrant and Isaac Shpantzer
dated April 4, 1997 (6)
10.11** Letter agreement by and between Registrant and Norm Smith dated
June 30, 1997 (6)
10.12** Letter agreement by and between Registrant and Norm Smith dated
September 29, 1997. (7)
10.13** Letter agreement by and between Registrant and Vladi Kelman dated
September 25, 1997 (7)
10.14** Letter agreement by and between Registrant and Dave Maenke dated
September 25, 1997 (7)
10.15** Letter agreement by and between Registrant and Paul Edelhertz
dated September 25, 1997 (7)
10.16 Sublease Agreement dated November 18, 1997, by and between
Registrant and ATIO Corporation USA, Inc. for premises at 7301
Ohms Lane, Edina, MN 55439 (11)
10.17** Change in Control Employment and Severance Agreement dated March
10, 1998, by and between Registrant and Michael A. Fabiaschi (11)
18
10.18** Change in Control Employment and Severance Agreement dated March
10, 1998, by and between Registrant and Steve Swantek (11)
10.19** Change in Control Employment and Severance Agreement dated March
10, 1998, by and between Registrant and Paul Edelhertz (11)
10.20 Series A Preferred Stock Purchase Agreement dated October 22,
1998, between the Registrant and Joseph Costello (12)
10.21 Lease Agreement dated October 20, 1995, by and between the
Registrant and All Phase Telecommunication, Inc. for premises at
10061 Bubb Road, Cupertino, California 95014 (12)
10.22 Lease Agreement dated April 8, 1998, by and between the
Registrant and EOP-New England Executive Park, L.L.C. for
premises at 8 New England Executive Park, Burlington,
Massachusetts 01893 (12)
10.23 Lease Agreement dated September 14, 1998, by and between the
Registrant and Square 24 Associates (d.b.a. Square 24 Associates
L.P.) for premises at 3875 Hopyard Road, Pleasanton, California
94588 (12)
10.24 Asset Purchase Agreement dated October 23, 1995 between the
Registrant and Business Partner Solutions, Inc. (5)
10.25 Agreement and Plan of Merger and Reorganization dated July 6,
1998, between the Registrant, QuickSilver Acquisition Corp. and
QuickSilver Group, Inc., and Addendum dated September 2, 1998, to
the Agreement and Plan of Merger and Reorganization between the
Registrant, QuickSilver Acquisition Corp. and QuickSilver Group,
Inc. (9)
23.01 Consent of KPMG Peat Marwick LLP
23.02 Consent of PricewaterhouseCoopers LLP
27 Financial Data Schedule
* Confidential treatment has been obtained for certain portions of
this agreement
** Management contract or compensatory plan required to be filed as
an exhibit to Form 10-K
(1) Filed as an Exhibit to the Company's Registration Statement on
Form S-1 (No. 33-70728), that was declared effective December 9,
1993, and incorporated herein by reference
(2) Filed as an Exhibit to the Company's Form 10-Q for the quarterly
period ended June 30, 1994, and incorporated herein by reference
(3) Filed as an Exhibit to the Company's Report on Form 8-K that was
filed with the Securities and Exchange Commission on September
15, 1994, and incorporated herein by reference
(4) Filed as an Exhibit to the Company's Form 10-K for the year ended
December 31, 1994, and incorporated herein by reference
(5) Filed as an Exhibit to the Company's Form 10-K for the year ended
December 31, 1995, and incorporated herein by reference
(6) Filed as an Exhibit to the Company's Form 10-Q for the quarterly
period ended June 30, 1997, and incorporated herein by reference
19
(7) Filed as an Exhibit to the Company's Form 10-Q for the quarterly
period ended September 30, 1997, and incorporated herein by
reference
(8) Filed as an Exhibit to the Company's Registration Statement on
Form S-8 that was declared effective on September 2, 1998, and
incorporated herein by reference
(9) Filed as an Exhibit to the Company's Report on Form 8-K that was
filed with the Securities and Exchange Commission on October 7,
1998, and incorporated herein by reference
(10) Filed as an Exhibit to the Company's Form 10-K for the year ended
December 31, 1998, and incorporated herein by reference
(11) Filed as an Exhibit to the Company's Registration Statement on
Form S-8 that was declared effective on October 22, 1998, and
incorporated herein by reference
(12) Filed as an Exhibit to this Form 10-K
ITEM 14(B).REPORTS ON FORM 8-K
The Company filed a report on Form 8-K on October 7, 1998, discussing the
acquisition of QuickSilver, the transfer of the NextNet technology to an entity
of the same name in conjunction with the venture financing of that entity, and
the change of the Company's name from "Racotek, Inc." to "Zamba Corporation."
Financial statements included with the Form 8-K included the balance sheets of
The QuickSilver Groups as of December 27, 1996, and December 26, 1997,
statements of operations, statements of stockholders' equity, and statements of
cash flows of The QuickSilver Group for each of the two years in the period
ended December 26, 1997.
On January 26, 1999, the Company filed a Form 8-K to report the resignation of
PricewaterhouseCoopers LLP ("PwC") as the Company's independent accountant, due
to the intended commencement of a business relationship between the Company and
the technology consulting practice of PwC. Subsequent to the 8-K filing, the
Company has formally entered a business relationship with PwC.
On February 12, 1999, the Company filed a Form 8-K to report the retention of
KPMG Peat Marwick LLP as the Company's new independent accountants.
20
Independent Auditors' Report
The Board of Directors and Stockholders
Zamba Corporation:
We have audited the consolidated financial statements of Zamba Corporation and
subsidiary as of and for the year ended December 31, 1998 as listed in the
accompanying index. In connection with our audit of the consolidated financial
statements, we also have audited the financial statement schedule as of and for
the year ended December 31, 1998 as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express
and opinion on these consolidated financial statements and financial statement
schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Zamba
Corporation and subsidiary as of December 31, 1998 and the results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles. Also in our opinion, the related
financial statement schedule as of and for the year ended December 31, 1998
when considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly, in all material respects, the information
set forth therein.
/s/ KPMG Peat Marwick LLP
Minneapolis, Minnesota
March 15, 1999
21
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Zamba Corporation:
We have audited the financial statements and the financial statement schedule of
Zamba Corporation, formerly known as Racotek, Inc. (the Company), as of December
31, 1997 and for each of the two years in the period ended December 31, 1997, as
listed in the accompanying index. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Zamba Corporation as of
December 31, 1997, and the results of its operations and its cash flows for each
of the two years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as whole, presents fairly, in all material
respects, the information required to be included therein.
/s/ PricewaterhouseCoopers LLP
Minneapolis, Minnesota
January 12, 1998
22
ZAMBA CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
1998 1997
---------------- ----------------
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $2,962 $3,103
SHORT-TERM INVESTMENTS - 2,233
ACCOUNTS RECEIVABLE, NET 2,150 561
UNBILLED RECEIVABLES 284 -
PREPAID EXPENSES AND OTHER CURRENT ASSETS 299 195
---------------- ----------------
TOTAL CURRENT ASSETS 5,695 6,092
PROPERTY AND EQUIPMENT, NET 1,175 786
RESTRICTED CASH 200 355
IDENTIFIABLE INTANGIBLE ASSETS, NET 6,768 -
GOODWILL, NET 38 -
OTHER ASSETS 65 4
---------------- ----------------
TOTAL ASSETS $13,941 $7,237
---------------- ----------------
---------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
CURRENT INSTALLMENTS OF LONG-TERM DEBT $285 $ -
ACCOUNTS PAYABLE 195 6
ACCRUED EXPENSES 765 651
DEFERRED REVENUE 334 303
---------------- ----------------
TOTAL CURRENT LIABILITIES 1,579 960
---------------- ----------------
LONG-TERM DEBT, LESS CURRENT INSTALLMENTS 1,240 -
---------------- ----------------
COMMITMENTS (NOTE 3)
TOTAL LIABILITIES 2,819 960
---------------- ----------------
STOCKHOLDERS' EQUITY :
PREFERRED STOCK, $0.01 PAR VALUE, 5,000,000 SHARES
AUTHORIZED, NONE ISSUED OR OUTSTANDING - -
COMMON STOCK, $0.01 PAR VALUE, 55,000,000 SHARES
AUTHORIZED, 29,014,203 AND 24,998,558
ISSUED AND OUTSTANDING AT DECEMBER 31, 1998
AND 1997, RESPECTIVELY 290 250
ADDITIONAL PAID-IN CAPITAL 78,667 71,265
ACCUMULATED DEFICIT (67,835) (65,088)
PROMISSORY NOTE RECEIVABLE - (150)
---------------- ----------------
TOTAL STOCKHOLDERS' EQUITY 11,122 6,277
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $13,941 $7,237
---------------- ----------------
---------------- ----------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.
23
ZAMBA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1998 1997 1996
---------------- ---------------- ----------------
NET REVENUES:
SERVICES $7,771 $4,744 $4,977
PRODUCTS 350 876 1,906
---------------- ---------------- ----------------
8,121 5,620 6,883
COST AND EXPENSES:
COST OF SERVICES 4,835 4,227 3,499
COST OF PRODUCTS 9 1,266 2,027
RESEARCH AND DEVELOPMENT 1,163 3,286 4,211
SALES AND MARKETING 2,209 4,149 6,249
GENERAL AND ADMINISTRATIVE 1,895 2,463 2,000
AMORTIZATION OF INTANGIBLES 936 - -
---------------- ---------------- ----------------
LOSS FROM OPERATIONS (2,926) (9,771) (11,103)
OTHER INCOME (EXPENSE):
INTEREST INCOME 225 427 859
INTEREST EXPENSE (46) - -
---------------- ---------------- ----------------
179 427 859
---------------- ---------------- ----------------
NET LOSS ($2,747) ($9,344) ($10,244)
---------------- ---------------- ----------------
---------------- ---------------- ----------------
NET LOSS PER SHARE - BASIC AND DILUTED ($0.11) ($0.37) ($0.42)
---------------- ---------------- ----------------
---------------- ---------------- ----------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 25,712,000 24,931,750 24,372,464
---------------- ---------------- ----------------
---------------- ---------------- ----------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.
24
ZAMBA CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
COMMON STOCK
-----------------------------------
ADDITIONAL PROMISSORY TOTAL
$0.01 PAR PAID-IN ACCUMULATED NOTE STOCKHOLDERS'
SHARES VALUE CAPITAL DEFICIT RECEIVABLE EQUITY
------------- ---------------------------------------------------------------
BALANCES AT DECEMBER 31, 1995 24,043,446 $240 $70,638 ($45,500) $- $25,378
EXERCISE OF STOCK OPTIONS 696,847 7 240 - - 247
NET LOSS - - - (10,244) - (10,244)
- -------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1996 24,740,293 247 70,878 (55,744) - 15,381
EXERCISE OF STOCK OPTIONS 258,265 2 241 - - 243
STOCK OPTIONS ISSUED TO CONSULTANTS - 1 146 - - 147
NET LOSS - - - (9,344) - (9,344)
PROMISSORY NOTE RECEIVABLE - - - - (150) (150)
- -------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1997 24,998,558 250 71,265 (65,088) (150) 6,277
EXERCISE OF STOCK OPTIONS 143,330 2 176 - - 178
SHARES ISSUED IN ACQUISITION 2,337,980 23 2,929 - - 2,952
OPTIONS AND WARRANTS ISSUED IN
ACQUISITION - - 1,275 - - 1,275
ISSUANCE AND CONVERSION OF
PREFERRED TO COMMON 1,000,000 10 1,990 - - 2,000
CONVERSION OF NOTE TO COMMON STOCK 534,335 5 1,032 - - 1,037
FORGIVENESS OF PROMISSORY NOTE
RECEIVABLE - - - - 150 150
NET LOSS - - - (2,747) - (2,747)
- -------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1998 29,014,203 $290 $78,667 ($67,835) $- $11,122
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.
25
ZAMBA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
1998 1997 1996
-------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS ($2,747) ($9,344) ($10,244)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
USED IN OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 1,436 1,011 969
LOSS ON SALE OF FIXED ASSETS 8 - -
WRITE-DOWN OF FIXED ASSETS - 519 -
FORGIVENESS OF PROMISSORY NOTE RECEIVABLE 150 - -
PROVISION FOR BAD DEBTS 13 118 233
WRITE-DOWN OF INVENTORIES - 207 1,110
AMORTIZATION OF PREMIUMS (DISCOUNTS) ON INVESTMENTS (17) 8 (94)
STOCK ISSUED FOR CONSULTING SERVICES - 147 -
CHANGES IN OPERATING ASSETS AND LIABILITIES:
ACCOUNTS RECEIVABLE 53 937 (195)
UNBILLED RECEIVABLES (284) - -
INVENTORIES - 167 (179)
PREPAID EXPENSES AND OTHER CURRENT ASSETS 54 99 224
ACCOUNTS PAYABLE (335) (651) 19
ACCRUED EXPENSES (604) (95) (232)
DEFERRED REVENUE (76) 168 13
-------------- ------------- -------------
NET CASH USED IN OPERATING ACTIVITIES (2,349) (6,709) (8,376)
CASH FLOWS FROM INVESTING ACTIVITIES:
PURCHASE OF INVESTMENTS (2,327) (2,250) (18,712)
PROCEEDS FROM MATURITY OF INVESTMENTS 4,577 9,000 25,512
PURCHASE OF PROPERTY AND EQUIPMENT (245) (105) (313)
PROCEEDS FROM SALE OF FIXED ASSETS 91 - -
ACQUISITION, NET OF CASH ACQUIRED (2,128) - -
PAYMENTS ON DEBT (39) - -
OTHER (54) 3 86
-------------- ------------- -------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (125) 6,648 6,573
CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS FROM EXERCISES OF OPTIONS AND WARRANTS 178 243 247
PROCEEDS FROM SALE OF PREFERRED STOCK 2,000 - -
CHANGES IN RESTRICTED CASH 155 115 115
ADVANCE TO STOCKHOLDER - (150) -
-------------- ------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,333 208 362
-------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (141) 147 (1,441)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,103 2,956 4,397
-------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $2,962 $3,103 $2,956
-------------- ------------- -------------
-------------- ------------- -------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.
26
ZAMBA CORPORATION
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS DESCRIPTION:
Zamba Corporation ("Zamba" or "the Company") is a national dedicated customer
care consulting company. The Company's services are designed to assist clients
in building lasting relationships with customers, increase the effectiveness of
customer service and sales operations and improve overall communication with
customers. Prior to October 1998, the Company was known as Racotek, Inc.
BASIS OF REPORTING
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary, which was acquired during 1998 (see
Note 4). All intercompany accounts and balances have been eliminated in
consolidation.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH EQUIVALENTS AND INVESTMENTS:
The Company considers all highly liquid investments in money market funds or
other investments with initial maturities of three months or less to be cash
equivalents. Investments with original maturities in excess of three months are
classified as short-term or long-term investments based on their remaining
maturities.
The Company had no non-cash equivalent investments as of December 31, 1998 and
in 1997, investments were considered by management to be "held to maturity," and
therefore were reported at their amortized cost. Amortization of premiums or
discounts are included in results of operations (see Note 2).
REVENUE RECOGNITION:
Revenues from fixed bid contracts are recognized as the services are performed
based on the percent-of-completion method (the ratio of hours incurred to total
estimated hours to complete the contract). Revenue from time and material
contracts are recognized as the services are performed. Customer support
revenues are recognized ratably over the term of the underlying support
agreements.
Deferred revenue is comprised of amounts received or billed in advance of
services to be performed. Unbilled revenue represents amounts recognized on
services performed in advance of billings in accordance with the terms of the
contract.
Revenue from software sold under license agreements, included in product
revenue, is recognized as revenue upon shipment if there are no post-delivery
obligations, and if the terms of the agreement are such that the payment of the
obligation is non-cancelable and non-refundable. Generally, other product
revenue is recognized upon shipment.
Effective January 1, 1998, the Company adopted Statement of Position (SOP) 97-2,
"Software Revenue Recognition". The adoption of this SOP has had no effect on
the Company's revenue recognition practices or any impact on its financial
position or results of operations.
RESEARCH AND DEVELOPMENT COSTS:
The Company capitalizes software development costs incurred in developing a
product once technological feasibility of the product has been determined. The
establishment of technological feasibility and the ongoing assessment of the
recoverability of these costs requires considerable judgment by management with
respect to certain external factors, including, but not limited to, anticipated
future gross product revenue, estimated economic life and changes in software
and hardware technology. Amortization of capitalized software development costs
begins when the product is available for general release to customers and is
computed on the basis of each
27
ZAMBA CORPORATION
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
product's projected revenues, but not less than on a straight-line basis over
the remaining estimated economic life of the product.
There were no software development costs capitalized during 1998, 1997, and
1996. Amortization expense of $0, $121,000, and $120,000 relating to
capitalized costs was recognized for the years ended December 31, 1998, 1997,
and 1996, respectively.
All other research and development expenditures are charged to expense as
incurred.
After the transfer of the NextNet technology in September 1998 (see Note 6) the
Company does not anticipate significant research and development projects and
expenses in 1999.
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost. Significant additions or
improvements extending asset lives are capitalized; normal maintenance and
repair costs are expensed as incurred. Depreciation is determined using the
straight-line method over the estimated useful lives of the assets which range
from two to seven years. Leasehold improvements are amortized on a
straight-line basis over the shorter of the estimated useful lives of the assets
or the underlying lease term (approximately five years). The cost and related
accumulated depreciation or amortization of assets sold or disposed of are
removed from the accounts and the resulting gain or loss is included in
operations.
INTANGIBLE ASSETS:
Intangible assets are being amortized over the economic useful lives of between
two and five years.
The Company assesses the potential impairment of its intangible assets based on
anticipated cash flows from operations. No impairment charges were recorded in
1998, 1997 or 1996.
INCOME TAXES:
The Company utilizes the asset and liability method of accounting for income
taxes whereby deferred taxes are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the years in which the differences are expected to reverse.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. Income tax expense is the sum of
the tax currently payable and the change in the deferred tax assets and
liabilities during the period.
STOCK-BASED COMPENSATION:
The Company has chosen to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations. The
Company accounts for stock-based compensation to non-employees using the fair
value method prescribed by Statements of Financial Accounting Standards (SFAS)
No. 123. Accordingly, compensation costs for stock options granted to employees
are measured as the excess, if any, of the value of the Company's stock at the
date of the grant over the amount an employee must pay to acquire the stock.
Compensation cost for stock options granted to non-employees is measured as the
fair value of the option at the date of grant. Such compensation costs, if any,
are amortized on a straight-line basis over the underlying option vesting terms.
NET LOSS PER SHARE:
Basic and diluted net loss per share is computed by dividing the net loss by
the weighted average number of shares of common stock outstanding during the
period. Assumed conversion shares were excluded from the net loss per share
computation as their effect is antidilutive. Common stock options could
potentially dilute basic earnings per share in future periods if the Company
generates net income.
28
ZAMBA CORPORATION
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
BUSINESS SEGMENTS:
Effective at year-end 1998, the Company adopted SFAS No. 131, "Disclosure
About Segments of an Enterprise and Related Information," which requires
disclosure of segment data in a manner consistent with that used by an
enterprise for internal management reporting and decision making. The
Company reports its operations as a single segment under SFAS No. 131.
RECLASSIFICATIONS:
Certain prior year amounts have been reclassified to conform to the current year
presentation.
2. SELECTED BALANCE SHEET INFORMATION:
DECEMBER 31,
(IN THOUSANDS)
--------------
Accounts Receivable, Net: 1998 1997
---- ----
Accounts receivable $ 2,377 $ 785
Less allowance for doubtful accounts (227) (224)
------- --------
$ 2,150 $ 561
------- --------
------- --------
Property and Equipment, Net:
Computer equipment $ 2,462 $ 1,453
Furniture and equipment 507 679
Leasehold improvements 186 106
------- --------
3,155 2,238
Less accumulated depreciation
and amortization (1,980) (1,452)
------- --------
$ 1,175 $ 786
------- --------
------- --------
Accrued Expenses:
Compensation and relocation $ 140 $ 169
Vacation 265 120
Deferred rent - 101
Accrued legal 50 55
Accrued capital purchases 50 -
Other 260 206
------- --------
$ 765 $ 651
------- --------
------- --------
INVESTMENTS
The Company's investments consisted of $0 and $2.23 million of U.S. Government
and agency debt securities in 1998 and 1997, respectively, including unamortized
discounts of $17,000 in 1997.
3. LEASE COMMITMENTS:
The Company maintains its corporate office in Minnesota and operating offices
in California and Massachusetts under terms of noncancelable operating leases
which expire between August 2000 and May 2003. These leases require the
Company to pay a pro rata share of the lessor's operating costs.
The Minnesota lease requires Zamba to maintain a restricted cash balance as
security for the Company's obligations under the lease. The remaining leases
require the Company to provide security deposits as part of the lease
agreement. Total rent expense, including a pro rata share of the lessor's
operating costs, were $286,000, $767,000, and $642,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
29
ZAMBA CORPORATION
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
In 1997, the Company recorded an accrual of $93,000 to recognize costs to be
incurred under terms of a prior lease agreement for other premises in excess
of estimated sublease income to be earned under terms of the sublease
agreement for those premises.
Future minimum lease payments under noncancelable operating leases are as
follows:
Year Ending December 31 Operating Leases
----------------------- ----------------
(in thousands)
1999 $ 596
2000 525
2001 183
2002 114
2003 48
4. ACQUISITION:
On September 22, 1998, the Company completed the acquisition of the QuickSilver
Group, Inc., ("QuickSilver") a customer care consulting company specializing in
software package implementation for call center management, sales automation ,
marketing automation, and automated field service and sales. The acquisition is
intended to be a tax free reorganization under the Internal Revenue Code of
1986, and for financial statement purposes has been recorded using the purchase
method of accounting. The consolidated financial statements of the Company
include the results of QuickSilver since September 22, 1998. The purchase price
consists of the following :
(in thousands)
Cash Paid $ 2,416
Notes payable (see Note 5) 2,162
Equity Common Stock 23
Additional Paid In Capital - Common Stock 2,929
Additional Paid in Capital - Options Exchanged 684
Additional Paid in Capital - Warrants Exchanged 579
-------
$ 8,793
-------
-------
The fair value of net tangible assets acquired was $1.09 million. The fair
value of the identifiable intangible assets acquired was $7.70 million and was
recorded in the following categories: people and experiences, client references,
client lists, and intellectual property and delivery methodology.
PROFORMA RESULTS
The following table presents the consolidated results of operations for the
Company for 1998 and 1997 on an unaudited pro forma basis as if the acquisition
had taken place at the beginning of each year:
UNAUDITED PRO FORMA
-------------------
(in thousands)
1998 1997
---- ----
Total revenue $9,992 $11,530
Net (loss) (7,631) (13,020)
Net (loss) per share - basic and diluted (0.28) (0.48)
30
ZAMBA CORPORATION
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
5. NOTES PAYABLE:
As part of the acquisition of QuickSilver, the Company issued $2.16 million in
promissory notes payable. Interest on the notes is computed at 7% of the
outstanding balance and is paid quarterly on the final day of each quarter,
commencing December 31, 1999, and ending December 31, 2003. Principal payments
are due quarterly on the last day of each quarter in 16 equal installments,
commencing December 31, 1999. Holders may request conversion of their notes to
common stock of Zamba. Conversion, which is computed at fair market value, is
at the sole and absolute discretion of Zamba's Board of Directors. On December
30, 1998, $1.02 million of the notes were converted to common stock, in addition
to $19,000 of interest payable related to such notes.
As part of the acquisition of QuickSilver, the Company also acquired debt
related to loan obligations. Loan payments are made monthly and consist of
principal and interest which is computed at a rate of 9.75%. Of these
obligations, $77,000 are payable in 1999 and $12,000 are payable in 2000.
The Company also acquired debt related to third party obligations. Payments on
these obligations are made monthly and consist of principal and interest.
Intrest on these obligations range from 9.59% to 20.21%. Of these third party
obligations, $36,000 are payable in 1999 and $6,000 are payable in 2000.
In September of 1998, the Company purchased software for $300,000. A down
payment of $50,000 was made and the payment plan allows the Company to defer
payment of $100,000 until September of 1999 and $150,000 until September of
2000.
Aggregate annual maturities of notes payable, subsequent to December 31, 1998,
are as follows:
Year Ending December 31 Payments on Notes
----------------------- -----------------
(in thousands)
1999 $ 285
2000 454
2001 286
2002 286
2003 214
Cash paid for interest charges in 1998 was $5,000. No cash was paid for
interest charges in 1997 or 1996.
6. NEXTNET:
On September 21, 1998, the Company transferred its patented "NextNet" wireless
data technology to an entity of the same name, in conjunction with the receipt
by that entity of $8.0 million in private investment capital to fund the further
development of the technology. The Company received forty-four percent (44%)
ownership of the new company NextNet in exchange for the technology. The
Company's investment in NextNet, the new company, is carried at $0, the
historical carrying basis of the technology transferred, as amounts incurred by
the Company up to the date of the transfer were charged to research and
development expense. The Company does not have any obligations to provide
funding for this investment.
7. STOCKHOLDERS' EQUITY:
The Company's stock incentive and option plans provide for grants of stock
options and stock awards. The number of common shares available for grant
pursuant to the plans were 3,107,226, 621,753, and 420,611 as of December 31,
1998, 1997 and 1996, respectively.
Options become exercisable over periods of up to four years from the date of
grant and expire within ten years from date of grant.
31
ZAMBA CORPORATION
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
The following table details option activity:
Weighted
Average
Price Per Exercise
Options Option Price
Balances, December 31, 1995 2,833,925 $ 0.10-12.625 $ 2.08
Granted 1,215,346 3.625-6.00 5.35
Exercised (696,847) 0.10-4.75 0.96
Canceled (440,752) 0.40-12.625 4.90
Balances, December 31, 1996 2,911,672 0.10-12.625 3.04
Granted 2,078,572 1.50-4.3125 2.37
Exercised (255,265) 0.20-3.88 1.16
Canceled (1,284,714) 0.10-12.625 5.06
Balances, December 31, 1997 3,450,265 0.20-12.625 2.69
Granted 6,061,492 1.50-4.325 1.93
Exercised (143,330) 0.20-3.25 1.38
Canceled (3,090,228) 1.50-7.25 2.75
Balances, December 31, 1998 6,278,199 $ 0.20-12.625 1.83
Options exercisable at
December 31, 1998 2,025,768 $ 0.20-12.625 $ 1.99
On October 13, 1998, the Company repriced outstanding stock options held by an
officer to the market value of the Company's stock as of October 13, 1998. In
connection with the repricing of outstanding stock options, all repriced options
started vesting on October 13, 1998, and become exercisable over periods of up
to four years from October 13, 1998. A total of 500,000 options, with an
original exercise price of $3.25, were repriced to $1.75.
On January 20, 1998, the Company repriced outstanding stock options held by
officers to the market value of the Company's stock as of January 20, 1998. In
connection with the repricing of outstanding stock options, all repriced options
started vesting on January 20, 1998, and become exercisable over periods of up
to four years from January 20, 1998. A combined total of 400,000 options, with
original exercise prices ranging from $3.00 to $3.9375, were repriced to $2.00
On October 20, 1997, the Company repriced outstanding stock options held by
employees to the market value of the Company's stock as of October 20, 1997. In
connection with the repricing of outstanding stock options, all repriced options
started vesting on October 20, 1997, and become exercisable over periods of up
to four years from October 20, 1997. Approximately 293,000 options, with
original exercise prices ranging from $2.25 to $12.625, were repriced to $1.50.
32
ZAMBA CORPORATION
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
7. STOCKHOLDERS' EQUITY, CONTINUED:
STOCK-BASED COMPENSATION:
No compensation cost has been recognized for stock options granted to employees
or directors under the 1989 Stock Option Plan, the 1993 Equity Incentive Plan,
1993 Directors Option Plan, 1998 Non-Officers Plan or the 1997 Stock Option Plan
for Key Employees, Consultants and Directors of QuickSilver Group, Inc.
(collectively referred to as "the Plans"). Had compensation cost for the Plans
been determined based on the fair value of options at the grant date for awards
in 1998, 1997 and 1996, the Company's net loss and net loss per share would have
increased to the pro forma amounts indicated below:
(In thousands, except per share amounts)
1998 1997 1996
---- ---- ----
Net loss As reported $(2,747) $(9,344) $(10,244)
Pro forma (4,982) (10,508) (11,180)
Net loss per
share - As reported (.11) (.37) (.42)
basic and
diluted Pro forma (.20) (.42) (.46)
The pro forma effect on the net loss for 1998, 1997 and 1996 is not fully
representative of the pro forma affect on net earnings (loss) in future years
because these years do not take into consideration pro forma compensation
expense related to grants made prior to 1995. In relation to the option
repricing described previously, the above proforma compensation expense includes
$120,000 and $37,000, for 1998 and 1997, respectively.
The aggregate fair value of options granted during 1998, 1997 and 1996,
respectively, was $3.53 million, $881,000 and $1.67 million for the 1993 Equity
Incentive Plan, $47,000, $193,000, and $328,000 for the 1993 Directors Option
Plan, $687,000, $0, and $0 for the 1998 Non-Officer Option Plan and $351,000,
$0, and $0 for the 1997 Stock Option Plan for Key Employees, Consultants and
Directors of QuickSilver Group, Inc. The aggregate fair value was calculated by
using the fair value of each option grant on the date of grant, utilizing the
Black-Scholes option-pricing model and the following key assumptions for the
Plans:
Assumptions 1998 1997 1996
- --------------------------------------------------------------------------------
Risk-free interest rates 4.18% - 5.71% 5.27% - 6.77% 5.27% - 6.77%
Volatility 79% 36% 50%
Expected lives (months) 60 60 60
- --------------------------------------------------------------------------------
The Company does not anticipate paying dividends in the near future.
The following table summarizes information about fixed-price stock options
outstanding at December 31, 1998:
Options Outstanding Options Exercisable
------------------------------------- --------------------
Weighted-
Number Average Weighted- Number Weighted-
Range of Outstanding Remaining Average Exercisable Average
Exercise at December Contractual Exercise at Exercise
Prices 31, 1998 Life Price December 31, 1998 Price
- --------------------------------------------------------------------------------
$0.20 - .84 606,055 6.29 $ 0.41 468,723 $ 0.34
1.50 - 2.38 4,518,602 9.13 1.71 1,047,569 1.70
2.44 - 3.88 810,036 8.62 3.00 186,916 3.22
4.12 - 5.13 313,881 7.37 4.70 293,185 4.73
5.50 -12.63 29,625 6.49 6.84 29,375 6.84
- --------------------------------------------------------------------------------
PREFERRED STOCK:
The Company's certificate of incorporation authorizes issuance of up to 5.0
million preferred shares with a par value of $0.01 and allows the Company's
Board of Directors, without obtaining the stockholders' approval, to issue
preferred stock. In October 1998, 1.0 million shares of preferred stock were
purchased by the chairman of the
33
ZAMBA CORPORATION
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
Board of Directors of the Company for $2.00 per share. These shares converted
by their terms to common stock on December 29, 1998. There were no preferred
shares issued or outstanding as of December 31, 1998 or 1997.
WARRANTS:
In connection with the acquisition of QuickSilver stock warrants to purchase
QuickSilver common stock were converted to 462,247 warrants to purchase Zamba
common stock. These warrants are immediately exercisable, but the underlying
acquired shares cannot be sold until after March 22, 1999, and expire on March
9, 2008.
STOCKHOLDER RIGHTS PLAN:
On September 7, 1994, the Board of Directors adopted a Stockholder Rights Plan.
Under this plan, the Board of Directors declared a dividend of one preferred
share purchase right (a "Right") for each share of common stock outstanding as
of September 28, 1994 (the "Record Date"). In addition, one Right will be
issued with each share of common stock that becomes outstanding after the Record
Date, except in certain circumstances. All Rights will expire on September 12,
2004, unless the Company extends the expiration date, redeems the Rights or
exchanges the Rights for common stock.
The Rights are initially attached to the Company's Common Stock and will not
trade separately. If a person or a group acquires 20 percent or more of the
Company's common stock (an "Acquiring Person") or announces an intention to make
a tender offer for 20 percent or more of the Company's common stock, then the
Rights will be distributed (the "Distribution Date") and will thereafter trade
separately from the common stock. Upon the Distribution Date, each Right may be
exercised for 1/100th of a share of a newly designated Series A Junior
Participating Preferred Stock at an exercise price of $25.00.
Upon a person or group becoming an Acquiring Person, holders of the Rights
(other than the Acquiring Person) will have the right to acquire shares of the
Company's common stock at a substantially discounted price in lieu of the
preferred stock. Additionally, if, after the Distribution Date, the Company
merges into or engages in certain other business combination transactions with
an Acquiring Person or 50 percent or more of its assets are sold in a
transaction with an Acquiring Person, the holders of Rights (other than the
Acquiring Person) will have the right to receive shares of common stock of the
acquiring corporation at a substantially discounted price.
After a person or a group has become an Acquiring Person, the Company's Board of
Directors may, at its option, require the exchange of outstanding Rights (other
than those held by the Acquiring Person) for common stock at an exchange ratio
of one share of the Company's common stock per Right. The board also has the
right to redeem outstanding Rights at any time prior to the Distribution Date
(or later in certain circumstances) at a price of $0.005 per Right. The terms
of the Rights, including the period to redeem the Rights, may be amended by the
Company's Board of Directors in certain circumstances.
8. INCOME TAXES:
The Company has incurred net operating losses since inception. Because of the
uncertainty about whether the Company will have taxable earnings in the future,
the Company has not reflected any benefit of such net operating loss
carryforwards in the accompanying consolidated financial statements.
At December 31, 1998, the Company has approximately $70.8 million of net
operating loss carryforwards for both financial statement and for federal income
tax purposes that begin to expire in 2005. The use of these carryforwards in
any one year is limited under Internal Revenue Code Section 382 because of
significant ownership changes. In addition, the net operating loss carryforward
of QuickSilver is limited under the federal consolidated tax return rules.
34
ZAMBA CORPORATION
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
8. INCOME TAXES, CONTINUED:
The provision for income taxes differs from the expected tax benefit, computed
by applying the federal corporate tax rate, as follow:
1998
----
Expected federal benefit $ (934,000)
Change in valuation allowance 1,649,000
State taxes, net (165,000)
Subsidiary net operating loss acquired (860,000)
Amortization 375,000
Other ( 65,000)
-----------
Total benefit $ -
-----------
-----------
Valulation allowances have been established for the entire tax benefit
associated with the carryforwards and net future deductible temporary
differences as of December 31, 1998, 1997 and 1996.
The tax effect of items that comprise a significant portion of deferred tax
assets is:
1998 1997
---- ----
Deferred tax assets:
Net operating loss carryforwards $ 28,328,000 $ 26,796,000
Tax credits 670,000 627,000
Other 504,000 430,000
Valuation allowance (29,502,000) (27,853,000)
----------- -----------
Net deferred tax asset $ - $ -
----------- -----------
Due to the uncertainty surrounding the timing of realizing the benefits of its
favorable tax attributes in future tax returns, the Company has placed a
valuation allowance against its otherwise recognizable deferred tax assets.
9. EMPLOYEE SAVINGS PLAN:
The Company offers a 401(k) defined contribution benefit plan for which all
regular employees are eligible. Participants may contribute up to 20% of
their compensation in any plan year subject to an annual limitation.
Employer contributions may be made at the discretion of the Company's Board
of Directors. No Company contributions have been made to the Plan.
10. MAJOR CUSTOMERS:
A portion of the Company's revenues have been derived from major clients for the
years ended December 31, 1998, 1997 and 1996 as follows:
1998 1997 1996
-------------------------------------------------------------
Customer 1 18% 7% 5%
Customer 2 11% 5% -
Customer 3 - 8% 11%
11. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amount for cash and cash equivalents, short-term investments and
long-term debt approximates fair value because of the short maturity of those
instruments.
35
ZAMBA CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------------------------------------------------- ----------------------------------------------------------------------------
BALANCE AT ADDITIONS DEDUCTIONS BALANCE AT
BEGINNING OF CHARGED TO FROM END OF
DESCRIPTION PERIOD EXPENSE ALLOWANCE PERIOD
- -------------------------------------------------- ----------------------------------------------------------------------------
Year ended December 31, 1998
Allowance for doubtful accounts (deducted
from accounts receivable)......................... $224 $13 ($10) $227
Year ended December 31, 1997
Allowance for doubtful accounts (deducted
from accounts receivable)......................... 340 118 (234) 224
Inventory obsolescence reserve (deducted
from inventories)................................. 856 207 (1,063) 0
Year ended December 31, 1996
Allowance for doubtful accounts (deducted
from accounts receivable)......................... 197 233 (90) 340
Inventory obsolescence reserve (deducted
from inventories)................................. 353 1,110 (607) 856
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ZAMBA CORPORATION
Date: March 29, 1999 By /s/ Paul D. Edelhertz
-----------------------------------------
Paul D. Edelhertz,
President and Chief Executive Officer
Each person whose signature appears below constitutes and appoints Paul
Edelhertz and Michael H. Carrel, jointly and severally, his true and lawful
attorneys-in-fact, each with the power of substitution, for him in any and all
capacities, to sign amendments to this Report on Form 10-K, and to file the
same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and confirming all
that said attorneys-in-fact, or his substitute or substitutes, may do or cause
to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Name Title Date
- ---- ----- ----
PRINCIPAL EXECUTIVE OFFICER:
/s/ Paul D. Edelhertz President and Chief March 29, 1999
- ------------------------ Executive Officer
Paul D. Edelhertz
PRINCIPAL FINANCIAL OFFICER
/s/ Michael H. Carrel Vice President and Chief March 29, 1999
- ------------------------ Financial Officer
Michael H. Carrel
OTHER DIRECTORS:
/s/ Joseph B. Costello Chairman of the Board March 29, 1999
- ------------------------
Joseph B. Costello
/s/ Dixon R. Doll Director March 29, 1999
- ------------------------
Dixon R. Doll
/s/ Michael A. Fabiaschi Director March 29, 1999
- -------------------------
Michael A. Fabiaschi
/s/ Thomas W. Minick Vice President and Director March 29, 1999
- -------------------------
Thomas W. Minick
37
ANNUAL MEETING
The Zamba Corporation annual stockholders' meeting will be held at the Marriott
City Center, 30 South Seventh Street, Minneapolis, Minnesota, 55402, at 3:00
p.m. C.S.T. on Thursday, May 20, 1999.
SHAREHOLDER INFORMATION
Zamba common stock trades on the Nasdaq National Market under the symbol ZMBA.
Stockholders and prospective investors are welcome to call, write or fax Zamba
with questions or requests for additional information. Copies of Zamba's Annual
Report on Form 10-K for the year ended December 31, 1998, may be obtained
without charge by directing inquiries to:
ZAMBA CORPORATION DIRECTORS CORPORATE OFFICERS
INVESTOR RELATIONS Joseph B. Costello Paul D. Edelhertz
7301 OHMS LANE, SUITE 200 Chairman of the Board President and Chief
MINNEAPOLIS, MN 55439 Zamba Corporation Executive Officer
TEL: 612-832-9800 Chairman and Chief Executive Officer
FAX: 612-832-9383 think3 Michael H. Carrel
WEBSITE: http:\\www.gozamba.com Vice President and
Paul D. Edelhertz Chief Financial
Transfer Agent President and Chief Executive Officer Officer
Norwest Bank Minnesota, N.A. Zamba Corporation
Stock Transfer Department Thomas W. Minick
161 North Concord Exchange Dixon R. Doll Vice President
P.O. Box 738 Founder and Chairman
South St. Paul, MN 55075-0738 Doll Capital Management John G. Higgins
Tel: 612-450-4101 Vice President
Fax: 612-450-4078 Michael A. Fabiaschi
President and Chief Executive Officer Todd X. Fitzwater
Independent Auditors LPA Software, Inc. Vice President
KPMG Peat Marwick LLP
Minneapolis, MN Thomas W. Minick
Vice President
Zamba Corporation
COMMITTEES OF THE BOARD
AUDIT COMMITTEE
Joseph B. Costello
Michael A. Fabiaschi
COMPENSATION COMMITTEE
Joseph B. Costello
Dixon R. Doll
38