10-Q 1 e10-q.txt FORM 10-Q 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF ----- THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF ----- THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ----- ----- COMMISSION FILE NUMBER 0-22718 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) (612) 832-9800 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Outstanding at Class August 4, 2000 ----- -------------- Common Stock, $0.01 par value 31,578,692 ================================================================================ 1 2 ZAMBA CORPORATION INDEX PART I -- Financial Information
Item 1. Financial Statements (Unaudited) Page No. -------- Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2000 and 1999 3 Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999 4 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2000 and 1999 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Item 3. Not Applicable PART II -- Other Information Items 1-3. None 13 Item 4. Submission of Matters to a Vote of Security Holders 13 Item 5. None 13 Item 6. Exhibits and Reports on Form 8-K 13 Signatures 14
2 3 PART I. FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS ZAMBA CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands, except per share data)
For the three months ended For the six months ended June 30, June 30, ------------------------------ --------------------------- 2000 1999 2000 1999 ------------ ------------ ------------ ----------- Net revenues $9,715 $7,007 $17,932 $12,357 Costs and expenses: Project and personnel costs 4,775 3,767 9,090 6,855 Sales and marketing 1,133 551 2,188 1,123 General and administrative 3,363 2,466 6,130 4,254 Amortization of intangibles and non-cash compensation 1,008 944 2,025 1,897 ------------ ------------ ------------ ----------- Loss from operations (564) (721) (1,501) (1,772) Other income (expense): Interest income 57 20 131 44 Interest expense (16) (26) (39) (54) ------------ ------------ ------------ ----------- 41 (6) 92 (10) Net loss ($523) ($727) ($1,409) ($1,782) ============ ============ ============ =========== Net loss per share - basic and diluted ($0.02) ($0.02) ($0.04) ($0.06) ============ ============ ============ =========== Weighted average shares outstanding 31,490 30,656 31,398 30,401 ============ ============ ============ ===========
The accompanying notes are an integral part of the consolidated financial statements. 3 4 ZAMBA CORPORATION CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands, except per share data)
June 30, December 31, 2000 1999 --------------- ------------- ASSETS Current assets: Cash and cash equivalents $5,112 $7,973 Accounts receivable, net 5,734 3,659 Unbilled receivables 497 274 Notes receivable - related parties 757 3 Prepaid expenses and other current assets 543 242 --------------- ------------- Total current assets 12,643 12,151 Property and equipment, net 1,145 1,068 Restricted cash - 110 Intangible assets, net 1,221 3,111 Other assets 308 71 --------------- ------------- Total assets $15,317 $16,511 =============== ============= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Current installments of long-term debt $499 $573 Accounts payable 1,654 1,079 Accrued expenses 1,602 3,029 Deferred revenue 1,331 763 --------------- ------------- Total current liabilities 5,086 5,444 Long-term debt, less current installments 608 816 --------------- ------------- Commitments Total liabilities 5,694 6,260 --------------- ------------- Stockholders' equity: Common stock, $0.01 par value, 55,000 shares authorized, 31,569 and 31,110 issued and outstanding at June 30, 2000 and December 31, 1999, respectively 316 311 Additional paid-in capital 80,676 79,900 Accumulated deficit (71,369) (69,960) --------------- ------------- Total stockholders' equity 9,623 10,251 --------------- ------------- Total liabilities and stockholders' equity $15,317 $16,511 =============== =============
The accompanying notes are an integral part of the consolidated financial statements. 4 5 ZAMBA CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands) Six Months Ended June 30, ------------------------------------- 2000 1999 ------------ ------------- Cash flows from operating activities: Net loss ($1,409) ($1,782) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 2,482 2,274 Provision for bad debts 324 79 Changes in operating assets and liabilities: Accounts receivable (2,399) (1,998) Unbilled receivables (223) (110) Prepaid expenses and other assets (538) 62 Accounts payable 575 695 Accrued expenses (1,427) 1,064 Deferred revenue 568 1,769 ------------ ------------- Net cash provided by (used in) operating activities (2,047) 2,053 Cash flows from investing activities: Purchase of property and equipment (535) (488) Notes receivable (754) - Other - (70) ------------ ------------- Net cash used in investing activities (1,289) (558) Cash flows from financing activities: Proceeds from exercises of stock options and warrants 647 111 Proceeds of long-term debt - 70 Payments of long-term debt (282) (92) Change in restricted cash 110 - Dividends - (18) ------------ ------------- Net cash provided by financing activities 475 71 ------------ ------------- Net increase (decrease) in cash and cash equivalents (2,861) 1,566 Cash and cash equivalents, beginning of period 7,973 3,054 ------------ ------------- Cash and cash equivalents, end of period $5,112 $4,620 ============ =============
The accompanying notes are an integral part of the consolidated financial statements. 5 6 ZAMBA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note A. Basis of Presentation: The unaudited consolidated financial statements of ZAMBA Corporation ("ZAMBA" or the "Company") as of June 30, 2000, and for the three and six month periods ended June 30, 2000, and 1999, reflect, in the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to fairly state our financial position as of June 30, 2000, and our results of operations and cash flows for the reported periods. The results of operations for any interim period are not necessarily indicative of the results to be expected for any other interim period or for the full year. The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. Certain prior year amounts have been reclassified to conform with the 2000 presentation. These financial statements should be read in conjunction with our audited consolidated financial statements and related notes for the year ended December 31, 1999, which were included in our 1999 Report on Form 10-K. Note B. Net Loss per Share: We incurred net losses for the three and six month periods ended June 30, 2000 and 1999, and excluded assumed conversion shares from the diluted loss per share computation, because their effect is anti-dilutive. At June 30, 2000, we had 8,968,052 stock options outstanding, which may be dilutive in future periods. Note C. Selected Balance Sheet Information:
(in thousands) June 30, 2000 December 31, 1999 ------------------- ------------------- Accounts receivable, net: Accounts receivable $6,236 $3,949 Less allowance for doubtful accounts (502) (290) ------------------- ------------------- $5,734 $3,659 =================== =================== Property and equipment, net: Computer equipment $3,123 $2,924 Furniture and equipment 992 822 Leasehold improvements 352 186 ------------------- ------------------- 4,467 3,932 Less accumulated depreciation and amortization (3,322) (2,864) ------------------- ------------------- $1,145 $1,068 =================== ===================
6 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW ZAMBA is a national customer care consulting company. According to the Gartner Group, customer care is expected to grow at a cumulative average growth rate of 54% per year through 2002. Our services are designed to assist clients in building lasting relationships with customers, increase the effectiveness of customer service and sales operations, and improve overall communication with customers. We deliver our services using a unique combination of accumulated expertise in the customer care field, existing technology, and client knowledge. We perform our services on both a fixed-bid, fixed-timetable and time and material basis. Rapid development and significant client involvement are key aspects to our methodologies. We offer our clients end-to-end assistance with their implementations, including business case evaluation, system planning and design, software implementation, modification and development, training, installation, change management, network management, and post-implementation support. Our services include the design, implementation and integration of enterprise level applications to facilitate sales automation, call center management, marketing automation and automated field service and sales. We also own approximately 30% of the equity in NextNet Wireless, Inc., a private corporation engaged in the development of wireless data products targeted at wireless DSL. The chairman of ZAMBA, Joseph B. Costello, is also the chairman of NextNet Wireless, Inc. We currently derive most of our revenue from systems integration services including business case evaluation, system planning and design, software package implementation, custom software development, training, installation, change management, and post-implementation support. Our revenues and earnings may fluctuate from quarter to quarter based on the number, size and scope of projects in which we are engaged, the contractual terms and degree of completion of such projects, any delays incurred in connection with a project, employee utilization rates, the adequacy of provisions for losses, the accuracy of estimates of resources required to complete ongoing projects, and general economic conditions and other factors. Also, revenues from a large client may constitute a significant portion of our total revenues in any particular quarter. RESULTS OF OPERATIONS Historical results have been restated to reflect our acquisitions of Camworks, Inc.("Camworks") on December 27, 1999, and Fusion Consulting, Inc. ("Fusion") on January 7, 2000. Both acquisitions are accounted for using the pooling-of-interests method. THREE MONTHS ENDED JUNE 30, 2000, COMPARED TO THE THREE MONTHS ENDED JUNE 30, 1999 Net Revenues Net revenues increased 39% to $9.72 million in 2000 compared to $7.01 million in 1999. The increase in revenues is principally due to increases in both the average size and number of client projects and due to an increase in the number of billable consultants. 7 8 Project and Personnel Costs Project and personnel costs consist primarily of salaries and employee benefits for personnel dedicated to client projects and direct expenses incurred to complete projects that were not reimbursed by the client. These costs represent the most significant expense ZAMBA incurs in providing its services. Project costs were $4.78 million or 49% of net revenues in the second quarter of 2000 compared to $3.77 million or 54% in the second quarter of 1999. The 27% increase in dollar terms was primarily due to the increase in project personnel. Project personnel increased as a result of the increased number and size of our engagements. The decline in project and personnel costs as a percentage of revenue is due to increased realized rates on projects. We expect project and personnel costs to increase on a dollar basis throughout 2000. Sales and Marketing Sales and marketing expenses were $1.13 million or 12% of net revenues in 2000 compared to $551,000 or 8% of net revenues in 1999. The increase in dollar and percentage terms is due to the hiring of additional direct sales personnel. We expect the amount spent for sales and marketing costs to continue to increase over the next few quarters. General and Administrative General and administrative costs consist primarily of expenses associated with our management, finance, human resources, information technology, and administrative groups, including occupancy costs. General and administrative expenses were $3.36 million or 35% of net revenues in 2000 compared to $2.47 million or 35% of net revenues in 1999. The increase in dollar terms is primarily due to an increase in non-billable headcount which is necessary to develop our infrastructure to support our anticipated growth. We also increased our allowance for outstanding accounts receivable as we continue to increase our customer base and revenue to cover for any potentially uncollectable accounts. We anticipate general and administrative costs to increase on a dollar basis over the next several quarters as we continue to grow and expand, which will include entering new and larger facilities and improving our technology infrastructure in order to support our anticipated revenue and headcount growth. Amortization of Intangibles and Non-cash Compensation Amortization of intangibles and non-cash compensation was $1.01 million in 2000 compared to $944,000 in 1999. The amortization is mainly due to the acquisition of The QuickSilver Group ("QuickSilver") in September 1998. The acquisition was accounted for using the purchase method of accounting and the purchase price was allocated to tangible and identifiable intangible assets. The fair value of identifiable intangible assets was $7.70 million and was allocated to the following categories: people and experiences, client references, client lists, and intellectual property and delivery methodology. These amounts are being amortized over economic useful lives of between two and four years. Approximately 97% of the costs related to the QuickSilver acquisition will be amortized by September 30, 2000. The increase from second quarter 1999 is also due to non-cash compensation from stock options granted to non-shareholder employees of Camworks and Fusion subsequent to our acquisitions of each company. The options were granted with an exercise price less than fair market value as a means of incenting the employees to continue employment with ZAMBA. The remaining deferred compensation balance related to these options is $804,000 as of June 30, 2000. The amount of this charge will be approximately $57,000 per quarter for each quarter through 2003. 8 9 Interest Income Interest income was $57,000 in 2000 compared to $20,000 in 1999. The increase is due to increases in our cash and investment accounts, which were provided by operating and financing activities. Also, additional interest income was provided in 2000 from outstanding notes receivable. Interest Expense Interest expense was $16,000 in 2000 compared to $26,000 in 1999. The interest charges are due to debt acquired as a result of the acquisition of QuickSilver and interest charges accrued for future payments of the notes payable issued in connection with the acquisition of QuickSilver. As the debt continues to be paid down, the amount of interest expense is expected to decline. Income Taxes Income tax expense was $0 in 2000 and 1999 due to operating losses in both years. Net Loss As a result of the above, the net loss for 2000 was $523,000, or ($0.02) per share, compared to a net loss for 1999 of $727,000, or ($0.02) per share. SIX MONTHS ENDED JUNE 30, 2000, COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1999 Net Revenues Net revenues increased 45% to $17.93 million in 2000 compared to $12.36 million in 1999. The increase in revenues is principally due to increases in both the average size and number of client projects and due to an increase in the number of billable consultants. Project and Personnel Costs Project and personnel costs consist primarily of salaries and employee benefits for personnel dedicated to client projects and direct expenses incurred to complete projects that were not reimbursed by the client. These costs represent the most significant expense ZAMBA incurs in providing its services. Project costs were $9.09 million or 51% of net revenues in 2000 compared to $6.86 million or 55% in 1999. The increase in dollar terms was primarily due to the increase in project personnel. Project personnel increased as a result of the increased number and size of our engagements. The decline in project and personnel costs as a percentage of revenue is due to increased realized rates on projects. We expect project and personnel costs to increase on a dollar basis throughout 2000 in order to deliver revenue growth from customer-centric solutions. Sales and Marketing Sales and marketing expenses were $2.19 million or 12% of net revenues in 2000 compared to $1.12 million or 9% of net revenues in 1999. The increase in dollar and percentage terms is due to the hiring of additional direct sales personnel. We expect the amount spent for sales and marketing costs to continue to increase over the next few quarters as we continue to grow our staff and pay commissions for the expected increase in revenue. General and Administrative General and administrative costs consist primarily of expenses associated with our management, finance, human resources, information technology, and administrative groups, including occupancy costs. General and administrative expenses were $6.13 million or 34% of net revenues in 2000 compared to $4.25 million 9 10 or 34% of net revenues in 1999. The increase in dollar terms is primarily due to an increase in non-billable headcount which is necessary to develop our infrastructure to support our anticipated growth. We anticipate general and administrative costs to increase on a dollar basis over the next several quarters as we continue to grow and expand, which will include entering new and larger facilities and improving our technology infrastructure in order to support our anticipated revenue and headcount growth. Amortization of Intangibles and Non-cash Compensation Amortization of intangibles and non-cash compensation was $2.03 million in 2000 compared to $1.90 million in 1999. The amortization is mainly due to the acquisition of The QuickSilver Group ("QuickSilver") in September 1998. The acquisition was accounted for using the purchase method of accounting and the purchase price was allocated to tangible and identifiable intangible assets. The fair value of identifiable intangible assets was $7.70 million and was allocated to the following categories: people and experiences, client references, client lists, and intellectual property and delivery methodology. These amounts are being amortized over economic useful lives of between two and four years. Approximately 97% of the costs related to the QuickSilver acquisition will be amortized by September 30, 2000. The increase from 1999 is also due to non-cash compensation from stock options granted to non-shareholder employees of Camworks and Fusion subsequent to our acquisitions of each company. The options were granted with an exercise price less than fair market value as a means of incenting the employees to continue employment with ZAMBA. The remaining deferred compensation balance related to these options is $804,000 as of June 30, 2000. The amount of this charge will be approximately $57,000 per quarter for each quarter through 2003. Interest Income Interest income was $131,000 in 2000 compared to $44,000 in 1999. The increase is due to increases in our cash and investment accounts, which were provided by operating and financing activities. Also, additional interest income was provided in 2000 from outstanding notes receivable. Interest Expense Interest expense was $39,000 in 2000 compared to $54,000 in 1999. The interest charges are due to debt acquired as a result of the acquisition of QuickSilver and interest charges accrued for future payments of the notes payable issued in connection with the acquisition of QuickSilver. As the debt continues to be paid down, the amount of interest expense is expected to decline. Income Taxes Income tax expense was $0 in 2000 and 1999 due to operating losses in both years. Net Loss As a result of the above, the net loss for 2000 was $1,409,000, or ($0.04) per share, compared to a net loss for 1999 of $1,782,000, or ($0.06) per share. LIQUIDITY AND CAPITAL RESOURCES As of June 30, 2000, we had no significant capital spending or purchase commitments and had cash and cash equivalents totaling $5.11 million and working capital of $7.56 million. During the first six months of 2000, we issued notes receivable to four employees totaling $754,000, which are still outstanding as of June 30, 2000. For the six months ended June 30, 2000, $2.12 million was used in operating activities compared 10 11 to the $2.05 million provided by operating activities in the same period in 1999. The decrease in cash provided from operating activities is due to an increase in accounts receivable, and a decrease in accrued expenses and deferred revenue. We believe our existing capital resources will be sufficient to meet our capital requirements in 2000. NEW ACCOUNTING STANDARDS Statement of Financial Accounting Standard No. 133 "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133), effective in 2001, establishes new standards for recognizing all derivatives as either assets or liabilities, and measuring those instruments at fair value. We have no derivative financial instruments. At the present time, we do not anticipate that SFAS No. 133 will have a material impact on the financial position or results of operations. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We have debt at a fixed interest rate ranging from 6.0% to 10.0%, as described in Item 7A in the 1999 Report on Form 10-K. There has been no material change to this information. FACTORS THAT MAY AFFECT FUTURE RESULTS Certain statements in this Report on Form 10-Q 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 our 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 our filings with the Securities and Exchange Commission. When used in this Report on Form 10-Q, the words "may," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "intend," "potential," or "continue" and similar expressions are generally intended to identify forward-looking statements. Because these forward-looking statements involve risks and uncertainties, actual results could differ materially from those expressed or implied by these forward-looking statements. ZAMBA Corporation assumes no obligation to update any forward-looking statements. These statements are only predictions. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, and/or performance of achievements. There can be no assurance that our business will grow as anticipated or that we will achieve or sustain profitability on a quarterly or annual basis in the future. We derive a substantial part of our revenues from a small number of clients whom, after evaluating our capabilities, decide whether to engage us 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 our business and results of operations. 11 12 In order for our revenues from consulting and integration services to grow, we must continue to add more clients and larger projects to plan, design and implement customer care systems. 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 our inability to hire and retain qualified personnel, the risk that we may need to enhance products and services beyond what is currently planned, the levels of promotion and marketing required to promote our products and services so as to attain a competitive position in the marketplace, or other risks and uncertainties identified in this Quarterly Report and our other filings with the SEC. 12 13 PART II. OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders Zamba held its Annual Meeting on May 18, 2000. Three proposals were presented at the Annual Meeting for voting by the stockholders: (i) the election of directors; (ii) the approval of the Zamba Corporation 2000 Employee Stock Purchase Plan; and (iii) the ratification of KPMG LLP as Zamba's independent auditors for 2000. The stockholders approved each proposal. Each person nominated for director was elected. For Joseph B. Costello, 25,783,842 votes were cast in favor of his election, and 146,614 votes were cast against. For Dixon R. Doll, 25,885,969 votes were cast in favor of his election, and 44,487 votes were cast against. For Paul D. Edelhertz, 25,773,669 votes were cast in favor of his election, and 156,787 votes were cast against. For Todd Fitzwater, 25,783,969 votes were cast in favor of his election, and 146,487 votes were cast against. For John Olsen, 25,875,719 votes were cast in favor of his election, and 54,737 votes were cast against. For Sven A. Wehrwein, 25,875,819 votes were cast in favor of his election, and 54,637 votes were cast against. 25,583,375 votes were cast in favor of the proposal to approve the Zamba Corporation 2000 Employee Stock Purchase Plan, 289,059 votes were cast against, 61,022 votes were abstentions, and there were no broker non-votes. 25,894,625 votes were cast in favor of ratifying the appointment of KPMG LLP as independent auditors for fiscal year 2000, 15,822 votes were cast against, 20,009 votes were abstentions, and there were no broker non-votes. Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits (see attached exhibit index) (b) Reports on Form 8-K: None 13 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ZAMBA CORPORATION By: /s/ Paul D. Edelhertz ----------------- Paul D. Edelhertz President and Chief Executive Officer By: /s/ Michael H. Carrel ----------------- Michael H. Carrel Vice President and Chief Financial Officer Dated: August 14, 2000 14 15 EXHIBIT INDEX
------------------------------------------------------------------------------------- EXHIBIT NUMBER TITLE ------------------------------------------------------------------------------------- 10.01 Lease Agreement dated May 5, 2000, between the Registrant and Harvard Property (Lake Calhoun), LP ------------------------------------------------------------------------------------- 10.02 Lease Agreement dated May 31, 2000, between the Registrant and EOP-New England Executive Park, LCC ------------------------------------------------------------------------------------- 27 Financial Data Schedule -------------------------------------------------------------------------------------
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