** **

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 
| **(Mark One**) |
|----------------|
| **ý**     | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For the quarterly period ended March 31, 2002**

 

**OR**

 
| **o**  | **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**

(Exactname of Registrant as specified in its charter)

 

| **Delaware**                                                           |   | **#41-1636021**                         |
|------------------------------------------------------------------------|--------|-----------------------------------------|
| (State  or other jurisdiction of   incorporation or organization)      |   | (I.R.S.  Employer   Identification No.) |
|                                                                   |   |                                    |
| **3033 Excelsior Boulevard, Suite 200, Minneapolis, Minnesota  55416** |
| (Address  of principal executive offices, including zip code)          |
|                                                                   |   |                                    |
| **(952)  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 theSecurities Exchange Act of 1934 during the preceding 12 months (or for such shorterperiod that the Registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

YES    ý                NO    o

 

Indicate the number of shares outstanding ofeach of the issuer’s classes of common stock, as of the latest practicabledate.

 
| **Class**                      |   | **Outstanding at May 14, 2002** |
|--------------------------------|--------|---------------------------------|
| Common  Stock, $0.01 par value |   | 38,965,355                      |

 

 

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ZAMBACORPORATION

 

INDEX

 
| PART I — Financial  Information |
|--------------------------------------|
|                                 |   |
| Item 1.                              | Financial Statements  (Unaudited) |
|                                 |   |   |
|                                 |   | Consolidated  Statements of Operations for the Three Months Ended March 31, 2002 and 2001 |
|                                 |   |   |
|                                 |   | Consolidated Balance  Sheets as of March 31, 2002 and December 31, 2001 |
|                                 |   |   |
|                                 |   | Consolidated  Statements of Cash Flows for the Three Months Ended March 31, 2002 and 2001 |
|                                 |   |   |
|                                 |   | Notes to  Consolidated Financial Statements |
|                                 |   |   |
| Item  2.                             | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
|                                 |   |
| Item  3.                             | Quantitative  and Qualitative Disclosures About Market Risk |
|                                 |   |   |
| PART II — Other  Information    |
|                                 |   |   |
| Item 1.                              | Legal Proceedings |   |
|                                 |   |   |
| Item 2.                              | Changes in Securities |   |
|                                 |   |   |
| Item 3.                              | Defaults Upon  Senior Securities |   |
|                                 |   |   |
| Item  4.                             | Submission  of Matters to a Vote of Security Holders |   |
|                                 |   |   |
| Item 5.                              | Other Information |   |
|                                 |   |   |
| Item 6.                              | Exhibits and  Reports on Form 8-K |   |
|                                 |   |   |
| Signatures                           |   |
|                                      |  |  |  |

 

2

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**Part I.Financial Information**

 

**Item1:  Financial Statements**

 

**ZAMBA CORPORATION**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 

**(Inthousands, except per share data)**

 
|                                                         |   | **For the  three months ended  March 31,** |       |
|--------------------------------------------------------------|--------|--------------------------------------------|------------|
|                                                         |   | **2002**                                   | ** ** | **2001** | ** ** |
| **Revenues:**                                                |   |                                       | ** ** |   | ** ** |
| **Professional  services**                                   |   | **$**                                      | **3,000**  | ** ** | **$** | **11,810** | ** ** |
| **Reimburseable  expenses**                                  |   | **235**                                    | ** ** | **1,273** | ** ** |
| **Total  revenue**                                           |   | **$**                                      | **3,235**  | ** ** | **$** | **13,083** | ** ** |
|                                                         |   |                                       | ** ** |   | ** ** |
| **Costs and  expenses:**                                     |   |                                       | ** ** |   | ** ** |
| **Project  and personnel costs**                             |   | **3,321**                                  | ** ** | **6,115** | ** ** |
| **Reimburseable  expenses**                                  |   | **235**                                    | ** ** | **1,273** | ** ** |
| **Sales and  marketing**                                     |   | **859**                                    | ** ** | **1,908** | ** ** |
| **General  and administrative**                              |   | **2,414**                                  | ** ** | **4,859** | ** ** |
| **Unusual  charges**                                         |   | **1,685**                                  | ** ** | **—** | ** ** |
| **Amortization  of intangibles**                             |   | **—**                                 | ** ** | **40** | ** ** |
| **Total  costs and expenses**                                |   | **8,514**                                  | ** ** | **14,195** | ** ** |
|                                                         |   |                                       | ** ** |   | ** ** |
| **Loss from  operations**                                    |   | **(5,279**                                 | **)**      | **(1,112** | **)** |
|                                                         |   |                                       | ** ** |   | ** ** |
| **Other  income (expense):**                                 |   |                                       | ** ** |   | ** ** |
| **Interest  income**                                         |   | **8**                                      | ** ** | **54** | ** ** |
| **Interest  expense**                                        |   | **(65**                                    | **)**      | **(24** | **)** |
| **Other  income (expense), net**                             |   | **(57**                                    | **)**      | **30** | ** ** |
|                                                         |   |                                       | ** ** |   | ** ** |
| **Net loss**                                                 |   | **$**                                      | **(5,336** | **)** | **$** | **(1,082** | **)** |
|                                                         |   |                                       | ** ** |   | ** ** |
| **Net loss  per share - basic and diluted**                  |   | **$**                                      | **(0.14**  | **)** | **$** | **(0.03** | **)** |
|                                                         |   |                                       | ** ** |   | ** ** |
| **Weighted  average shares outstanding - basic and diluted** |   | **37,014**                                 | ** ** | **32,174** | ** ** |

 

**The accompanying notes are an integral part of theconsolidated financial statements.**

 

3

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**ZAMBA CORPORATION**

**CONSOLIDATEDBALANCE SHEETS**

**(Unaudited)**

 

**(Inthousands, except per share data)**

 
|                                                                                                                                                                  |       | **March 31,** |       | **December  31,** |       |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------|------------|-------------------|------------|
|                                                                                                                                                                  |       | **2002**      | ** ** | **2001**          | ** ** |
| **ASSETS**                                                                                                                                                            | ** ** |
| **Current  assets:**                                                                                                                                                  |       |          | ** ** |              | ** ** |
| **Cash and  cash equivalents**                                                                                                                                        |       | **$**         | **562**    | ** **        | **$**      | **1,326** | ** ** |
| **Accounts  receivable, net**                                                                                                                                         |       | **1,393**     | ** ** | **1,556**         | ** ** |
| **Unbilled  receivables**                                                                                                                                             |       | **532**       | ** ** | **608**           | ** ** |
| **Notes  receivable**                                                                                                                                                 |       | **—**    | ** ** | **560**           | ** ** |
| **Notes  receivable - related parties**                                                                                                                               |       | **90**        | ** ** | **310**           | ** ** |
| **Prepaid  expenses and other current assets**                                                                                                                        |       | **684**       | ** ** | **737**           | ** ** |
| **Total  current assets**                                                                                                                                             |       | **3,261**     | ** ** | **5,097**         | ** ** |
|                                                                                                                                                                  |       |          | ** ** |              | ** ** |
| **Property  and equipment, net**                                                                                                                                      |       | **1,081**     | ** ** | **1,799**         | ** ** |
| **Restricted  cash**                                                                                                                                                  |       | **471**       | ** ** | **471**           | ** ** |
| **Other  assets**                                                                                                                                                     |       | **268**       | ** ** | **301**           | ** ** |
| **Total  assets**                                                                                                                                                     |       | **$**         | **5,081**  | ** **        | **$**      | **7,668** | ** ** |
|                                                                                                                                                                  |       |          | ** ** |              | ** ** |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                        | ** ** |
| **Liabilities:**                                                                                                                                                      |       |          | ** ** |              | ** ** |
| **Line of  credit**                                                                                                                                                   |       | **$**         | **850**    | ** **        | **$**      | **1,100** | ** ** |
| **Current  installments of long-term debt**                                                                                                                           |       | **144**       | ** ** | **392**           | ** ** |
| **Accounts  payable**                                                                                                                                                 |       | **1,043**     | ** ** | **1,059**         | ** ** |
| **Accrued  expenses**                                                                                                                                                 |       | **2,897**     | ** ** | **2,490**         | ** ** |
| **Deferred  revenue**                                                                                                                                                 |       | **161**       | ** ** | **101**           | ** ** |
| **Deferred  gain on sale of investment**                                                                                                                              |       | **700**       | ** ** | **—**        | ** ** |
| **Total  current liabilities**                                                                                                                                        |       | **5,795**     | ** ** | **5,142**         | ** ** |
|                                                                                                                                                                  |       |          | ** ** |              | ** ** |
| **Long-term  debt, less current installments**                                                                                                                        |       | **357**       | ** ** | **194**           | ** ** |
| **Other  long-term liabilities**                                                                                                                                      |       | **449**       | ** ** | **244**           | ** ** |
|                                                                                                                                                                  |       |          | ** ** |              | ** ** |
| **Commitments**                                                                                                                                                       |       |          | ** ** |              | ** ** |
| **Total  liabilities**                                                                                                                                                |       | **6,601**     | ** ** | **5,580**         | ** ** |
|                                                                                                                                                                  |       |          | ** ** |              | ** ** |
| **Stockholders’  equity (deficit):**                                                                                                                             |       |          | ** ** |              | ** ** |
| **Common  stock, $0.01 par value, 120,000 shares authorized, 38,965 and 35,007 shares  issued and outstanding at March 31, 2002 and December 31, 2001, respectively** |       | **390**       | ** ** | **350**           | ** ** |
| **Additional  paid-in capital**                                                                                                                                       |       | **86,091**    | ** ** | **84,403**        | ** ** |
| **Note  receivable from director**                                                                                                                                    |       | **(500**      | **)**      | **(500**          | **)**      |
| **Accumulated  deficit**                                                                                                                                              |       | **(87,501**   | **)**      | **(82,165**       | **)**      |
| **Total  stockholders’ equity (deficit)**                                                                                                                        |       | **(1,520**    | **)**      | **2,088**         | ** ** |
|                                                                                                                                                                  |       |          | ** ** |              | ** ** |
| **Total  liabilities and stockholders’ equity**                                                                                                                  |       | **$**         | **5,081**  | ** **        | **$**      | **7,668** | ** ** |

 

**The accompanying notes are an integral part of theconsolidated financial statements.**

 

4

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**ZAMBA CORPORATION**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 

**(Inthousands)**

 
|                                                                             |   | **Three  Months Ended  March 31,** |       |
|----------------------------------------------------------------------------------|--------|------------------------------------|------------|
|                                                                             |   | **2002**                           | ** ** | **2001** | ** ** |
| **Cash  flows from operating activities:**                                       |   |                               | ** ** |   | ** ** |
| **Net loss**                                                                     |   | **$**                              | **(5,336** | **)** | **$** | **(1,082** | **)** |
| **Adjustments  to reconcile net loss to net cash used in operating activities:** |   |                               | ** ** |   | ** ** |
| **Depreciation  and amortization**                                               |   | **147**                            |       | **257** |   |
| **Provision  for bad debts**                                                     |   | **20**                             | ** ** | **95** | ** ** |
| **Changes  in operating assets and liabilities:**                                |   |                               | ** ** |   | ** ** |
| **Accounts  receivable**                                                         |   | **168**                            | ** ** | **(89** | **)** |
| **Unbilled  receivables**                                                        |   | **76**                             | ** ** | **243** | ** ** |
| **Notes  receivable**                                                            |   | **535**                            | ** ** | **144** | ** ** |
| **Prepaid  expenses and other assets**                                           |   | **86**                             | ** ** | **(32** | **)** |
| **Accounts  payable**                                                            |   | **(16**                            | **)**      | **(350** | **)** |
| **Accrued  expenses and other long-term liabilities**                            |   | **1,226**                          | ** ** | **(50** | **)** |
| **Deferred  revenue**                                                            |   | **60**                             | ** ** | **(832** | **)** |
| **Net cash  used in operating activities**                                       |   | **(3,034**                         | **)**      | **(1,696** | **)** |
|                                                                             |   |                               | ** ** |   | ** ** |
| **Cash  flows from investing activities:**                                       |   |                               | ** ** |   | ** ** |
| **Purchase  of property and equipment**                                          |   | **(30**                            | **)**      | **(302** | **)** |
| **Proceeds  from sale of investment**                                            |   | **700**                            | ** ** | **—** | ** ** |
| **Proceeds  from sale of equipment**                                             |   | **1**                              | ** ** | **—** | ** ** |
| **Restricted  cash**                                                             |   | **—**                         | ** ** | **(207** | **)** |
| **Notes  receivable - related parties**                                          |   | **220**                            | ** ** | **12** | ** ** |
| **Net cash  provided by (used in) investing activities**                         |   | **891**                            | ** ** | **(497** | **)** |
|                                                                             |   |                               | ** ** |   | ** ** |
| **Cash  flows from financing activities:**                                       |   |                               | ** ** |   | ** ** |
| **Line of  credit, net**                                                         |   | **(250**                           | **)**      | **3,000** | ** ** |
| **Proceeds  from sale of common stock**                                          |   | **1,701**                          | ** ** | **152** | ** ** |
| **Proceeds  from exercises of stock options**                                    |   | **13**                             | ** ** | **22** | ** ** |
| **Payments  of long-term debt**                                                  |   | **(85**                            | **)**      | **(230** | **)** |
| **Net cash  provided by financing activities**                                   |   | **1,379**                          | ** ** | **2,944** | ** ** |
|                                                                             |   |                               | ** ** |   | ** ** |
| **Net  increase (decrease) in cash and cash equivalents**                        |   | **(764**                           | **)**      | **751** | ** ** |
| **Cash and  cash equivalents, beginning of period**                              |   | **1,326**                          | ** ** | **4,843** | ** ** |
| **Cash and  cash equivalents, end of period**                                    |   | **$**                              | **562**    | ** ** | **$** | **5,594** | ** ** |
|                                                                             |   |                               | ** ** |   | ** ** |
| **Supplemental  Schedule for Disclosures of Cash Flow Information:**             |   |                               | ** ** |   | ** ** |
|                                                                             |   |                               | ** ** |   | ** ** |
| **Cash paid  during the period for interest**                                    |   | **$**                              | **75**     | ** ** | **$** | **18** | ** ** |

 

**The accompanying notes are an integral part of theconsolidated financial statements.**

 

5

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ZAMBACORPORATION

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note A. Basis of Presentation:

 

The unauditedconsolidated financial statements of ZAMBA Corporation as of March 31, 2002,and for the three month periods ended March 31, 2002 and 2001, reflect alladjustments (which include only normal recurring adjustments) necessary, in theopinion of management, to fairly state our financial position as of March 31,2002, and our results of operations and cash flows for the reportedperiods.  The results of operations forany interim period are not necessarily indicative of the results to be expectedfor any other interim period or for the full fiscal year.  The year-end balance sheet data was derivedfrom audited financial statements, but does not include all disclosuresrequired by generally accepted accounting principles.  Certain prior year amounts have been reclassified to conform withthe 2002 presentation.  These financialstatements should be read in conjunction with our audited consolidatedfinancial statements and related notes for the year ended December 31, 2001,which were included in our 2001 Annual Report on Form 10-K.

 

Note B. Liquidity

 

We incurred significant losses and negative cash flows from operationsduring the three months ended March 31, 2002, and continued to incur operatinglosses in the first month of the second quarter of fiscal 2002.  To fund our operations, between January 1,2002 and April 30, 2002, we have secured a total of $5,160,000 infinancing, including $3,480,000 in exchange for selling some of our NextNetWireless, Inc. (“NextNet”) stock, and an additional $1,680,000 in exchange forour own common stock.  Thesetransactions were as follows:

 

Between January 1, 2002 and March 31, 2002, as discussed in Note I, wesold 3,879,912 shares of our common stock for an aggregate total of$1,680,000.  Also, in February 2002 andMarch 2002, as discussed in Note H, we entered into two stock purchase agreements with Joseph B.Costello, our chairman, that resulted in our selling 233,333 shares of ourSeries A Preferred Stock in NextNet to Mr. Costello, for anaggregate consideration of $700,000.

 

In April 2002, weentered into stock purchase agreements to sell 563,329 shares of our Series APreferred Stock in NextNet to ten (10) accredited investors in privatetransactions for an aggregate consideration of approximately $2,780,000.  We received $1,480,000 of the proceeds inApril.  Pursuant to these agreements, wewill also receive an additional $500,000 in May, $400,000 in August, and$400,000 in September.  See Note H foradditional discussion.

 

We partly fund our operations through our line of credit with SiliconValley Bank.  As of March 31, 2002 (ourmost recent monthly reporting period to the bank), we were not in compliancewith the minimum tangible net worth covenant with the bank for our line ofcredit.  However, because of our sales of some of ourNextNet stock since that date, we have regained compliance with the covenantand Silicon Valley Bank provided us with a written waiver of our March 31, 2002non-compliance.  Our ability to continue as a going concerndepends upon our ability to continue to access our line of credit facility,obtain additional funding, and achieve sustained profitability.  The accompanying financial statements havebeen prepared on a going concern basis, which assumes continuity of operationsand realization of assets and liabilities in the ordinary course of business.  These

 

6

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financialstatements do not include any adjustments that might result if we were forcedto discontinue our operations.

 

Note C. Selected Balance Sheet Information:

 
| **(in  thousands)**                             |   | **March 31, 2002** |   | **December 31, 2001** |   |
|-------------------------------------------------|--------|--------------------|--------|-----------------------|--------|
| Accounts receivable, net:                       |   |               |   |                  |   |
| Accounts receivable                             |   | $                  | 1,533  |                  | $      | 1,739 |   |
| Less allowance for  doubtful accounts           |   | (140               | )      | (183                  | )      |
|                                            |   | $                  | 1,393  |                  | $      | 1,556 |   |
| Property and equipment,  net:                   |   |               |   |                  |   |
| Computer equipment                              |   | $                  | 1,668  |                  | $      | 1,695 |   |
| Furniture and equipment                         |   | 491                |   | 614                   |   |
| Leasehold improvements                          |   | 502                |   | 1,189                 |   |
|                                            |   | 2,661              |   | 3,498                 |   |
|                                            |   |               |   |                  |   |
| Less accumulated  depreciation and amortization |   | (1,580             | )      | (1,699                | )      |
|                                            |   | $                  | 1,081  |                  | $      | 1,799 |   |

 

Note D.  NetLoss Per Share:

 

We incurred netlosses for the three-month periods ended March 31, 2002 and 2001. Thecalculation of diluted net loss per common share does not include approximately4,500 and 640,000 potential shares of common stock equivalents as of March 31,2002 and 2001, respectively, as their inclusion would be anti-dilutive.

 

Note E.  RecentAccounting Standards:

 

In November 2001,the Financial Accounting Standards Board (“FASB”) issued a Staff Announcement,entitled Topic No. D-103, regarding the income statement classification ofreimbursements received for “out-of-pocket” expenses incurred. This StaffAnnouncement requires that out-of-pocket expenses incurred and the relatedreimbursements for these expenses be reflected in the income statement on agross basis as both revenue and expense. Previously, we had classified these out-of-pocket expense reimbursementsas a reduction of project and personnel costs. This Staff Announcement is effective for financial reporting periodsbeginning after December 15, 2001, and accordingly, we implemented this StaffAnnouncement on January 1, 2002.  Wehave adjusted revenue for all periods reported to include out-of-pocket expensereimbursements.  This change inclassification had no effect on current or previously reported net loss or lossper share.

 

In August 2001,FASB issued Statement of Financial Accounting Standards No. 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”), whichaddresses financial accounting and reporting for the impairment or disposal oflong-lived assets.  While SFAS No. 144supersedes both SFAS No. 121, “Accounting for the Impairment of Long-LivedAssets and for Long-Lived Assets to Be Disposed Of,” and APB Opinion No. 30,“Reporting the Results of Operations—Reporting the Effects of Disposal of aSegment of a Business, and Extraordinary, Unusual and Infrequently OccurringEvents and Transactions”, it retains the 

 

7

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fundamental provisions of those Statements.  SFAS No. 144 is effective for fiscal yearsbeginning after December 15, 2001, and accordingly, we implemented it onJanuary 1, 2002.  The implementation ofSFAS No. 144 did not have an impact on our financial position, results ofoperations or cash flows for the three months ended March 31, 2002.

 

In July 2001, FASBissued SFAS No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill andOther Intangible Assets,” which change the accounting for business combinationsand goodwill.  SFAS No. 141 requiresthat the purchase method of accounting be used for business combinationsinitiated after June 30, 2001.  Use ofthe pooling-of-interests method is prohibited. SFAS No. 142 changes the accounting for goodwill from an amortizationmethod to an impairment-only approach. Amortization of goodwill, including goodwill recorded in past businesscombinations, would have therefore ceased upon adoption of SFAS No. 142, whichfor us was January 1, 2002.  Theimplementation of SFAS No. 141 and SFAS No. 142 did not have an impact on ourfinancial position, results of operations or cash flows for the three monthsended March 31, 2002, as we had no goodwill remaining to be amortized from pastbusiness combinations.

** **

Note F.   Unusual Charges:

 

In the firstquarter of 2002, we incurred unusual charges of $1.69 million related tostreamlining our operations. Included in this amount was a one-time charge for $1.34 million relatedto subleasing our Campbell, California, facility and terminating the lease forour Colorado Springs, Colorado, facility. These transactions will result in anannual cost savings of $1.0 million.  Inaddition, a $350,000 charge was taken for severance pay relating to reducedheadcount, including three vice presidents, in the first quarter of 2002.  Our headcount decreased in the first quarter of 2002 by 32employees, or 19% of our total workforce, through layoffs or voluntaryattrition. Of these reductions, 24 employees (or approximately 75%) werebillable consultants and 8 employees (or approximately 25%) were non-billablestaff.  Because most of theconsultants who separated from employment were not engaged on full-timeprojects at the time of our workforce reduction, our ongoing operations werenot materially adversely affected by this reduction. However, the reductions inour billable staff may prevent us from obtaining future revenues from thosepositions, if revenue opportunities are available, unless we are able to hirereplacement personnel in time to staff the potential future revenueopportunities.  We expect the headcount reductions to result in an annual savings of$3.5 million. We have paid $543,000 of these unusual charges as of March 31,2002, and expect to pay  $650,000 in thesecond quarter of 2002, $165,000 in the third quarter of 2002, $40,000 in thefourth quarter of 2002, and the remaining balance of $287,000 through June2007.

 

Note G.   Line of Credit:

 

On February 27,2001, as amended on August 2, 2001 and December 31, 2001, we established asecured revolving credit facility with Silicon Valley Bank that entitles us toborrow up to a maximum of $5.0 million based on eligible collateral.  Borrowings under this line of credit bearinterest at the bank’s prime rate plus 2.0%, and are payable monthly.  The amended agreement requires, among otherthings, that we comply with minimum tangible net worth and profitability covenants.  We were not in compliance with the tangiblenet worth covenant as of March 31, 2002. However, because of our sales of some of our NextNet stock since thatdate, we have regained compliance with the covenant and Silicon Valley Bank hasprovided us with a written waiver of our March 31, 2002 non-compliance.  As of March 31, 2002, a total of $850,000was outstanding under the line of credit, which was the maximum eligible amountavailable to us under the credit facility as of that date.  This facility expires on December 31, 2002.

 

8

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Note H.   Sales of Investments:

 

Subsequent to theend of the first quarter, we entered into two series of transactions withprivate investors in which we sold portions of our equity holdings in NextNetWireless, Inc. (“NextNet”).  The firstseries of transactions occurred between April 10 and April 16, 2002, when weentered into stock purchase agreements with six private investors, in which theinvestors purchased an aggregate of 200,000 shares of our Series A PreferredStock in NextNet.  The investors paid usan aggregate amount of $600,000 for the shares, which were sold at a per shareprice of $3.00.  As a result of thisfirst series of transactions, the NextNet shares that we had agreed to sell toour chairman, Joseph B. Costello, pursuant to two stock purchase agreements,one dated February 26, 2002, and amended on March 25, 2002, and the seconddated March 25, 2002, were valued at $3.00 per share. As of March 31, 2002, Mr.Costello paid us $700,000 pursuant to these two Stock Purchase Agreements,which means that as a result of the $3.00 per share valuation, Mr. Costellowill receive 233,333 of our NextNet shares.

 

The second seriesof transactions occurred between April 10 and April 30, 2002. During thissecond series, we entered into stock purchase agreements with nine privateinvestors, in which we sold an aggregate of 363,329 shares of our Series APreferred Stock in NextNet for an aggregate consideration of $2,180,000.  Of this amount, $880,000 was received inApril, $500,000 is to be received in May, $400,000 is to be received on August1, 2002 and $400,000 is to be received on September 1, 2002.  All of the shares were sold at a per shareprice of $6.00.

 

All of the NextNetshares that we sold, including those sold to Mr. Costello, are subject to theright of first refusal on the parts of NextNet and the holders of the Series BPreferred Stock of NextNet.

 

As of March 31,2002, the transactions with Mr. Costello were recorded as a deferred gain onsale of investment, because the per share valuation for the shares had not yetbeen determined.  During the secondquarter of 2002, as a result our sales of our NextNet stock, including thesales to Mr. Costello, we will report a gain on sale of investment of$3,480,000. As of May 1, 2002, our remaining ownership is 1,603,338 shares ofSeries A Preferred Stock in NextNet, or approximately 25% of the equity inNextNet.  NextNet is a privatecorporation that develops non-line-of-sight broadband wireless access platformsthat provide telecommunications carriers with solutions for rapid deployment ofhigh-speed, two-way voice and data services over the “last mile” of thecommunications network.  Our chairman,Joseph B. Costello, is also the chairman of NextNet. Another one of ourdirectors, Dixon Doll, is also a director and a shareholder of NextNet.

 

Note I.   Stockholders’ Equity and Warrants:

 

We sold some of our common stock on three occasions during the firstquarter.  On January 31, 2002, Mr. Costello purchased 626,504shares of our common stock from us in a private transaction at a purchase priceof $0.479 per share, for an aggregate consideration of $300,000. In connectionwith Mr. Costello’s January 31, 2002, stock purchase, we issued Mr. Costello awarrant to purchase up to 313,252 shares of our common stock.  This warrant may be exercised at a per sharepurchase price of $0.599 at any time through the close of business on January31, 2007.  The shares were issued at 90%of the average closing bid price for our common stock for the twenty tradingdays prior to the date of issuance, and the exercise price for the warrant wasset at 125% of the per share price for the common stock purchased by Mr.Costello. The fair value of the warrant is $105,000, which is included as partof additional paid-in capital.

 

On February 1,2002, we sold 793,383 shares of our common stock at a purchase price of $0.479per share to a group of seven individual investors in private transactions, for$380,000.  The purchase price is equalto 90% of the average closing bid prices of our common stock on the NasdaqNational Market System for the twenty business days prior to February 1, 2002.  In connection with this transaction, we alsoissued warrants to the individuals in this group that entitles them to purchaseup to 396,691 shares of our common stock, at an exercise

 

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price of $0.599 per share. These warrants may be exercised at any time through the close ofbusiness on February 1, 2007.  Thewarrant exercise price represents 125% of the average closing bid prices of ourcommon stock on the Nasdaq National Market System for the twenty business daysprior to February 1, 2002.  Theaggregate fair value of the warrant is $130,000, which is included as part ofadditional paid-in capital.

 

On February 22,2002, we entered into a Strategic Alliance Agreement with HCL TechnologiesAmerica, Inc. (“HCL America”) and HCL Technologies Limited, India (“HCL”), inwhich we will work with HCL and HCL America to jointly pursue, facilitate,manage and maintain certain business opportunities with Amdocs and Blue CrossBlue Shield for the provision of CRM services through the use of the servicesoffered by, and the particular experience and expertise of, ZAMBA, HCL Americaand HCL.  In connection with theStrategic Alliance Agreement, HCL America purchased 2,460,025 shares of ourcommon stock from us in a private transaction, for an aggregate considerationof $1,000,000, and we issued HCL America a warrant to purchase up to 615,006shares of our common stock.  Thiswarrant may be exercised at a per share purchase price of $0.61 at any timethrough the close of business on February 21, 2007.  The shares were issued at the average closing bid price for ourcommon stock for the twenty trading days preceding the date of the agreement,and the exercise price for the warrant was set at 150% of the per share pricefor the common stock purchased by HCL America. As a result of the purchase of our shares and the issuance of thewarrant, HCL America and HCL, as the parent company of HCL America, are nowjointly beneficial owners of more than 5% of our outstanding common stock. Thefair value of the warrant is $142,000, which is included as part of additionalpaid-in capital.

 

The fair value ofthe above warrants were calculated by utilizing the Black-Scholesoption-pricing model and the following key assumptions:

 

|                    |   | **January 31, 2002Warrant** |   | **February 1, 2002Warrant** |   | **February 22, 2002Warrant** |   |
|-------------------------|--------|-----------------------------|--------|-----------------------------|--------|------------------------------|--------|
|                    |   |                        |   |                        |
| Risk-free interest rate |   | 4.40                        | %      | 4.40                        | %      | 4.27                         | %      |
| Volatility              |   | 108                         | %      | 108                         | %      | 108                          | %      |
| Expected life (months)  |   | 60                          |   | 60                          |   | 60                           |   |

 

**Item2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

**Overview**

 

ZAMBA Corporationprovides customer relationship management (“CRM”) consulting and systemsintegration services for large corporations and other organizations.  CRM is a business strategy used bybusinesses and governmental organizations to help clients better anticipate,understand and respond to the needs of their current and potential customersthrough integrated, multi-channel solutions. CRM attempts to increase theircustomers’ access to the enterprise through the use of multiple channels ofcommunication, including the internet, call-based routing, and sales forceautomation, and to increase the enterprise’s knowledge of the preferences andneeds of its customers.  Based on ourCRM expertise and experience, we have created solutions that we believe addresseach aspect of CRM, including strategy, marketing and analytics, content andcommerce, contact center, field sales, field service and enterpriseintegration.  We also own stock inNextNet Wireless, Inc. (“NextNet”), a private corporation that developsnon-line-of-sight broadband wireless access platforms that providetelecommunications carriers with solutions for rapid deployment of high-speed,two-way voice and data services over the “last mile” of the communicationsnetwork.  Our chairman, Joseph B.Costello, is also the chairman of NextNet. Another one of our directors, DixonDoll, is also a director and a shareholder of NextNet.

 

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See Note H to our Notes to ConsolidatedFinancial Statements for additional discussion regarding our sale of a certainportion of our NextNet investment.

 

We currentlyderive most of our revenues from systems integration services, includingbusiness case evaluation, system planning and design, software packageimplementation, custom software development, training, installation and changemanagement.  Our revenues and earningsmay fluctuate from quarter-to-quarter based on the number, size and scope ofprojects in which we are engaged, the contractual terms and degree ofcompletion of such projects, any delays incurred in connection with a project,the adequacy of provisions for losses, the accuracy of estimates of resourcesrequired to complete ongoing projects, and general economic conditions andother factors. Consequently, the results of operations described in this reportmay not be indicative of results to be achieved in future periods. In addition,revenues from a large client may constitute a significant portion of our totalrevenues in any particular quarter.

 

**Strategic Alliance With HCL Technologies**

 

On February 22, 2002, we entered into a Strategic Alliance Agreementwith HCL Technologies America, Inc. (“HCL America”) and HCL TechnologiesLimited, India (“HCL”), in which we will work with HCL and HCL America tojointly pursue, facilitate, manage and maintain business opportunities withAmdocs and Blue Cross Blue Shield for the provision of CRM services through theuse of the services offered by, and the particular experience and expertise of,ZAMBA, HCL America and HCL.  In connectionwith the Strategic Alliance Agreement, HCL America purchased 2,460,025 sharesof our common stock from us in a private transaction, for an aggregateconsideration of $1,000,000, and we issued HCL America a warrant to purchase upto 615,006 shares of our common stock. This warrant may be exercised at a per share purchase price of $0.61 atany time through the close of business on February 21, 2007.  The shares were issued at the averageclosing bid price of our common stock for the twenty trading days preceding thedate of the agreement, and the exercise price for the warrant was set at 150%of the per share price for the common stock purchased by HCL America.  As a result of the purchase of our sharesand the issuance of the warrant, HCL America and HCL, as the parent company ofHCL America, are now jointly beneficial owners of more than 5% of ouroutstanding common stock.

 

**Restructuringand Other Unusual Charges**

 

We undertook arestructuring action in the second quarter of 2001, when we recorded a restructuringcharge of $2.19 million.  We made otherheadcount reductions in the third and fourth quarters of 2001, and took furthercost-reduction measures in the first quarter of 2002.  As a result of all of these actions, we have reduced our fixedquarterly expenses by more than $5 million, which is an approximate annualsavings of $21 million.

 

Our restructuringcharge in the second quarter of 2001was composed of $777,000 for severance payments, $123,000 for otheremployee-related costs (including continued medical benefits for the terminatedemployees), $1.173 million for facility closings and other leasehold termination costs, $87,000 to resolve a contract disputewith a vendor, and $28,000 of other related restructuring charges.  No non-cash write-offs were incurred inconnection with the restructuring charge.

 

We conducted thisrestructuring for reasons including the following: (1) the impact of theslowing economy on our business, and similar revenue decreases experienced bymany other information technology consulting companies, and (2) our expectationthat our revenue during the remainder of 2001 would be less than the amount wehad anticipated at the beginning of 2001. Because we had increased our staffingand facilities

 

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during the last half of 2000 and firstquarter of 2001 in anticipation of growth, our reduced expectations required usto lower our ongoing costs, the largest of which were our payroll and facilityexpenses.  Even with these restructurings,payroll and facility expenses remain our largest ongoing expenses.

 

In order to reduceour payroll expenses, we reduced our headcount in the second quarter of fiscal2001 by 89 employees, which represented approximately 28% of our total workforce.  Of these 89 employees, 62 employees (orapproximately 70%) were billable consultants and 27 employees (or approximately30%) were non-billable staff.   Becausemost of the consultants who were laid off were not engaged on full-timeprojects at the time of our workforce reduction, our ongoing operations werenot materially adversely affected by this reduction. We paid all $900,000 ofthe employee-related restructuring charge during the year ended December 31,2001. 

 

The facilitiesportion of the restructuring charge in the second quarter of 2001 includes newand additional lease termination costs and other expenses associated with ourdecisions to consolidate our operations and close unproductive or duplicativeoffice locations in St. Paul, Minnesota, and Pleasanton and Carlsbad,California.  Of the approximately $1.2million in facilities-related restructuring charges incurred in the secondquarter of 2001, we paid $813,000 through March 31, 2002, and expect to pay thebalance of approximately $360,000 between the second quarter of fiscal 2002 andthe third quarter of fiscal 2002.

 

Although ourrevenues were lower than anticipated in fiscal 2001, because the reduced numberof our consultants and size of our facilities was designed to correlate withthe decrease in revenues that we expected, the restructuring charges that weincurred in fiscal 2001 did not have a material adverse effect on ouroperations.  In fact, the restructuringcharge reduced our cost structure for the second half of fiscal 2001 and intofiscal 2002.  We intend to continue ourinitiative to achieve more cost-efficient operations throughout fiscal2002.  In addition, certain actionsrelated to facilities may not be completed, or full savings realized, untilsometime in fiscal 2002. Although we do not expect to incur additionalrestructuring charges, a continued slowing of the demand for informationtechnology consulting services, could cause us to incur additionalrestructuring expenses in amounts that have not yet been determined.  Although the amount and timing of the costsavings that we expect to realize due to this restructuring is difficult toquantify, we currently anticipate that, in combination with other operationalchanges effectuated during the second quarter of 2001, we will realize costsavings of approximately $11.0 million during fiscal 2002, which is part of the$21 million annual cost savings as described in the first paragraph of thissection.  Because we attempted tocorrelate the number of consultants and facilities we retained with ourexpected revenues during the remainder of fiscal 2001, our workforce reductionsin the second quarter of fiscal 2001 did not significantly affect ouroperations, except that we expect the restructuring charge to reduce our coststructure into fiscal 2002.

 

In the third and fourth quarters of 2001, we took other actions tostreamline our operations. Our employee headcount decreased by 63 employeesduring the third and fourth quarters of 2001, through layoffs and voluntaryattrition. This represented approximately 28% of the workforce that remainedafter the restructuring actions taken in the second quarter of 2001. Of theseemployees, 41 employees (or approximately 65%) were billable consultants and 22employees (or approximately 35%) were non-billable staff.  Because most of the consultants who were laid off werenot engaged on full-time projects at the time of our workforce reduction, ourongoing operations were not materially adversely affected by this reduction. We expect the headcount reductions to resultin an annual savings of $6.5 million, which is part of the $21 millionannual cost savings as described in the first paragraph of this section.  

 

In the firstquarter of 2002, we incurred unusual charges of $1.69 million related to streamliningour operations. Included in this amount was a one-time charge for$1.34 million related to subleasing our Campbell, California, facility andterminating the lease for our Colorado Springs, Colorado, facility. Thesetransactions will

 

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result in anannual cost savings of $1.0 million.  Inaddition, a $350,000 charge was taken for severance pay relating to reducedheadcount, including three vice presidents, in the first quarter of 2002.  Our headcount decreased in the first quarterof 2002 by 32 employees, or 19% of our total workforce, through layoffs orvoluntary attrition. Of these reductions, 24 employees (or approximately 75%)were billable consultants and 8 employees (or approximately 25%) werenon-billable staff.  Because most ofthe consultants who separated from employment were not engaged on full-timeprojects at the time of our workforce reduction, our ongoing operations werenot materially adversely affected by this reduction. However, the reductions inour billable staff may prevent us from obtaining future revenues from thosepositions, if revenue opportunities are available, unless we are able to hirereplacement personnel in time to staff the potential future revenueopportunities.  We expect the headcount reductions to result in an annual savings of$3.5 million, which is part of the $21 million annual cost savings asdescribed in the first paragraph of this section.  We have paid $543,000 ofthese unusual charges as of March 31, 2002, and expect to pay  $650,000 in the second quarter of 2002,$165,000 in the third quarter of 2002, $40,000 in the fourth quarter of 2002,and the remaining balance of $287,000 through June 2007.

 

**Results ofOperations**

 

**Three months ended March 31, 2002, compared to the threemonths ended March 31, 2001**

 

*Net Revenues*

Revenues decreasedapproximately 75% to $3.24 million in the first quarter of 2002 compared to$13.08 million in the first quarter of 2001. Revenues before reimbursementsdecreased approximately 75% to $3.00 million in the first quarter of 2002compared to $11.81 million in the first quarter of 2001.  The decrease was due principally to asignificant reduction in the demand for information technology consultingservices, due to a general slowdown in the economy. With the economic slowdown,many companies either delayed decisions on information technology consultingprojects, or cancelled the projects altogether, resulting in an industry-widedecrease in revenue.  In conjunctionwith the decrease in our revenues, the utilization rate of our billableconsultants declined from 50% in the first quarter of 2001 to 40% in the firstquarter of 2002. We are also experiencing pricing pressure, which is impactingour revenue. Our average billable hourly rate was $126 in the first quarter of2002, which is a significant decrease from the $213 average billable hourlyrate we recorded in the first quarter of 2001.

 

*Project and Personnel Costs*

Project andpersonnel costs consist primarily of payroll and payroll-related expenses forpersonnel dedicated to client assignments. These costs represent the most significant expense we incur in providingservice.  Project costs were $3.32 millionor 103% of net revenues in the first quarter of 2002 compared to $6.12 millionor 47% of net revenues in the first quarter of 2001.  The decrease in project costs in dollar terms between theseperiods was due primarily to the decrease in our headcount. However, thesecosts represented an increased percentage of our overall revenue in the firstquarter of 2002, because our revenue decreased at a greater rate than wereduced project and personnel costs.

 

*Reimbursable Expenses*

Reimbursable expenses consist of out-of-pocket expenses incurred whileproviding services that are reimbursed by our clients. Pursuant to FinancialAccounting Standards Board Staff Announcement (Topic No. D-103), which waseffective for reporting periods beginning after December 15, 2001, reimbursableexpenses are separate line items in both revenue and cost of revenue. Prior toimplementation of this Announcement, we had accounted for reimbursable expensesby offsetting the amounts we were paid against project and personnelcosts.  Reimbursable expenses decreased82% to $235,000 in the first quarter of 2002 compared to $1.27 million in the

 

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first quarter of2001. The decrease is due to the overall decline in revenue and servicesperformed during the same time period.

 

*Sales and Marketing*

Sales andmarketing costs consist primarily of salaries, employee benefits and travelexpenses of sales and marketing personnel, as well as promotional costs.  Sales and marketing expenses were $859,000or 27% of net revenues in the first quarter of 2002, compared to $1.91 millionor 15% of net revenues in the first quarter of 2001.  The decrease in dollar terms between these periods was due to areduction in the number of sales and marketing personnel, as well as lowercommission expenses resulting from the decrease in revenue. The increase inpercentage terms is due primarily to having lower revenue than anticipated inthe first quarter of 2002. We anticipate the dollar amount of sales andmarketing expenses will decrease over the next two fiscal quarters.

 

*General and Administrative*

General andadministrative costs consist primarily of expenses associated with ourmanagement, information technology, training and recruiting, occupancy costs,and finance and administrative groups. General and administrative expenses were $2.41 million or 75% of netrevenues in the first quarter of 2002, compared to $4.86 million or 37% of netrevenues in the first quarter of 2001. The increase in percentage terms is dueprimarily to having lower revenue than anticipated in the first quarter of 2002.  The dollar decrease was primarily due toimplementing cost savings measures resulting in a decrease of $1.0 million insalaries from reduced workforce, a decrease of $500,000 in recruiting fees, adecrease of $200,000 in travel and entertainment expenses, and a decrease of$180,000 in telephone and network connection expenses. We anticipate the dollaramount of general and administrative expenses will decrease over the next twofiscal quarters.

 

*Unusual Charges*

Unusual charges were $1.69 million in the first quarter of 2002compared to $0 in the first quarter of 2001, and represent charges forsubleasing facilities, as well as severance pay for headcount reductions in thefirst quarter of 2002. A one-time charge for $1.34 million was taken in the first quarter of 2002 for subleasing our Campbell, California,facility and for terminating our Colorado Springs, Colorado, facility lease. Inaddition, we incurred a $350,000 charge for severance pay related to headcountreductions, including three vice presidents, in the first quarter of 2002.  We have paid $543,000 of these unusualcharges as of March 31, 2002, and expect to pay  $650,000 in the second quarter of 2002, $165,000 in the thirdquarter of 2002, $40,000 in the fourth quarter of 2002, and the remainingbalance of $287,000 through June 2007.

 

*Amortization of Intangibles*

Amortization ofintangibles was $0 in the first quarter of 2002 compared to $40,000 in thefirst quarter of 2001.  The amortizationin 2001 was mainly due to tangible and identifiable intangible assets incurredfrom the acquisition of The QuickSilver Group, Inc. (“QuickSilver”) inSeptember 1998.  All tangible andidentifiable intangible assets from the acquisition were completely amortizedas of December 31, 2001.  TheQuickSilver acquisition was accounted for using the purchase method ofaccounting, and the purchase price was allocated to tangible and identifiableintangible assets.  The fair value ofidentifiable intangible assets was $7.7 million and was allocated to thefollowing categories: people and experiences, client references, client lists,and intellectual property and delivery methodology.  These amounts were amortized over economic useful lives rangingfrom two to four years.

 

*Interest Income*

Interest incomewas $8,000 in the first quarter of 2002 compared to $54,000 in the firstquarter of 2001.  The decrease is due todecreases in our cash and investment accounts, which were used in operating andinvesting activities.

 

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*Interest Expense*

Interest expensewas $65,000 in the first quarter of 2002 compared to $24,000 in the firstquarter of 2001.  The increase ininterest charges is due to increased borrowings under our line of credit withSilicon Valley Bank, as well as amortization of our issuance costs related tothe credit facility, which we established in February 2001.

 

*Income Taxes*

We have incurrednet operating losses since inception. Because we are uncertain as to whether we will have taxable earnings inthe future, we have not reflected any benefit of such net operating losscarryforwards in the accompanying unaudited consolidated financial statements.

 

*Net Loss*

Our net loss forthe quarter ended March 31, 2002 was $5.34 million, or $0.14 per share,compared to a net loss for the quarter ended March 31, 2001 of $1.08 million,or $0.03 per share.

 

**Critical Accounting Policies**

 

We have identifiedthe policies below as critical to our business operations and the understandingof our results of operations.  Theimpact and any associated risks to these policies on our business, financialconditions and results of operations is discussed throughout Management’sDiscussion and Analysis of Financial Condition and Results of Operations wherethese policies affect our reported and expected financial results.  Our preparation of this Form 10-Q requiresus to make estimates and assumptions that affect the reported amount of assetsand liabilities, disclosure of contingent assets and liabilities as of the dateof our financial statements, and the reported amounts of revenue and expensesduring the reporting period.  There canbe no assurance that actual results will not differ from those estimates.

 

Ourcritical accounting policies are as follows:

•                  Revenue Recognition;

•                  Allowance for Doubtful Accounts; and

•                  Investmentin NextNet Wireless, Inc.

 

For a detailed discussion of the applicationof these and other accounting policies, see Note 1 of the notes to theconsolidated financial statements in our 2001 Annual Report on Form 10-K.

 

***Liquidity and Capital Resources***

 

We investprimarily in instruments that are highly liquid, investment grade and havematurities of less than one year. At March 31, 2002, we had approximately$562,000 in cash and cash equivalents, compared to $1.33 million at December31, 2001. As of March 31, 2002, we had no significant capital spending orpurchase commitments.  As of March 31,2002, we had working capital of a negative $2.5 million.

 

Cash used inoperating activities was $3.03 million for the three months ended March 31,2002 and resulted primarily from a loss before depreciation and amortizationof  $5.19 million, which was offset by aincrease in accrued expenses of $1.23 million and a decrease in notesreceivable of $535,000.  Cash used in

 

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operating activities was $1.70 million for the threemonths ended March 31, 2001, due primarily to a loss before depreciation andamortization of  $825,000 and a decreasein deferred revenue of $832,000.

 

Cash provided frominvesting activities was $891,000 for the three months ended March 31, 2002,and resulted primarily from proceeds of $700,000 from the sale of a portion ofour NextNet shares and payments of $220,000 from notes receivable — relatedparties.  Cash used in investingactivities was $497,000 for the three months ended March 31, 2001 and resultedprimarily from the purchase of property and equipment of $302,000 and anincrease in restricted cash of $207,000.

 

Cash provided byfinancing activities was $1.38 million for the three months ended March 31,2002 and consisted primarily of cash received from the sale of common stock of$1.70 million, offset by a decrease of $250,000 in borrowings under our line ofcredit. See Note I to our Notes to Consolidated Financial Statements foradditional discussion regarding our sale of common stock.  Cash provided by financing activities was$2.94 million for the three months ended March 31, 2001 and consisted primarilyof cash received from the line of credit.

 

Future paymentsdue under debt and lease obligations, excluding sublease income, are as follows(in thousands):

 
|                               |   |                     |   |               |   | **Non  CancelableOperating  Leases** |   |   |   |
|------------------------------------|--------|--------------------------|--------|--------------------|--------|--------------------------------------|--------|--------|--------|
| **TwelveMonths Ending  March 31,** |   | **Bank Line  Of Credit** |   | **Notes  Payable** |   |                                 |   |   |
|                               |   |                     |   |               |   |
|                               |   |                     |   | **Total**          |   |
| 2003                               |   | $                        | 850    |               | $      | 144                                  |   | $      | 3,896  |   | $ | 4,890 |   |
| 2004                               |   | —                   |   | 357                |   | 3,434                                |   | 3,791  |   |
| 2005                               |   | —                   |   | —             |   | 3,030                                |   | 3,030  |   |
| 2006                               |   | —                   |   | —             |   | 2,214                                |   | 2,214  |   |
| 2007                               |   | —                   |   | —             |   | 1,119                                |   | 1,119  |   |
| Later                              |   | —                   |   | —             |   | 240                                  |   | 240    |   |
| Total                              |   | $                        | 850    |               | $      | 501                                  |   | $      | 13,933 |   | $ | 15,284 |   |

 

Future payments due to ZambaCorporation for subleases are as follows (in thousands):

 
| **TwelveMonths Ending  March 31,** |   | **Sublease  Amounts  Due Zamba** |   |
|------------------------------------|--------|----------------------------------|--------|
|                               |   |
|                               |   |
| 2003                               |   | $                                | 906    |   |
| 2004                               |   | 1,144                            |   |
| 2005                               |   | 1,042                            |   |
| 2006                               |   | 1,073                            |   |
| 2007                               |   | 1,106                            |   |
| Later                              |   | 238                              |   |
| Total                              |   | $                                | 5,509  |   |

 

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We established oursecured revolving credit facility with Silicon Valley Bank on February 27,2001, and amended the credit facility on August 2, 2001 and again on December31, 2001.  This line of credit allows usto borrow up to a maximum of $5.0 million based on eligible collateral, whichis set at 70% of our eligible accounts receivable.  Borrowings under this line of credit bear interest at the bank’sprime rate plus 2.0%, and are payable monthly. The amended agreement requires, among other things, that we comply withminimum tangible net worth and profitability covenants.  We were not in compliance with the tangiblenet worth covenant as of March 31, 2002.  However, we subsequently cured the default by applying the proceeds fromthe sale of some of our NextNet stock, and Silicon Valley Bank has formallywaived our March 31, 2002 non-compliance. Our line of credit is renewable annually. As of March 31, 2002, $850,000was outstanding under the line of credit, which was the maximum eligible amountavailable to us under the credit facility as of that date.

 

In April 2002, weentered into stock purchase agreements to sell certain of our Series APreferred Stock in NextNet Wireless, Inc. (“NextNet”) to various parties. Thetotal proceeds received in April 2002 were $1,480,000.  We will also receive an additional $500,000in May, $400,000 in August and $400,000 in September from these sales.  See Note H to our Notes to ConsolidatedFinancial Statements for additional discussion regarding our sales of NextNetstock.

 

We believe thatour existing cash and cash equivalents, together with cash provided fromoperations, our secured revolving credit facility, and the sale of a portion ofour NextNet investment as described above, should be sufficient to meet ourworking capital and capital expenditure requirements through at least June 15,2002. We will continue to explore possibilities for additional financing, whichmay include debt, equity, or other forms of financing transactions, and otherstrategic alternatives that may be available to us, including a potential saleof all or a portion of our stock, assets, or investments.  We cannot be certain that additionalfinancing will be available to us on favorable terms, if at all. If ourfinancial performance causes us to violate the covenants in our securedrevolving credit facility or adversely affects the amount of our eligibleaccounts receivable, and we are unable to obtain additional financing, we maynot be able to meet our cash requirements beyond June 15, 2002.  Ourability to continue as a going concern depends upon our ability to continue toaccess our line of credit facility, obtain additional funding, and achievesustained profitability.  Theaccompanying financial statements have been prepared on a going concern basis,which assumes continuity of operations and realization of assets andliabilities in the ordinary course of business.  These financial statements do not include any adjustments thatmight result if we were forced to discontinue our operations.

 

**Item 3. Quantitative and Qualitative Disclosures About Market Risk**

 

We are exposed tomarket risk from changes in security prices and interest rates. Marketfluctuations could impact our results of operations and financial condition. Weare exposed to certain market risks based on our outstanding debt obligationsof $501,000 at March 31, 2002, as well as our line of credit with SiliconValley Bank, under which $850,000 was outstanding at March 31, 2002. Theinterest rates charged on our long-term debt obligations range from 7.0% to10.0%, and these obligations mature quarterly through December 2003.  Borrowings under the line of credit bearinterest at the bank’s prime rate plus 2.0%. The interest is payable monthly.We do not invest in any derivative financial instruments. Excess cash isinvested in short-term low-risk vehicles, such as money market investments.Changes in interest rates are not expected to have a material adverse effect onour business, financial condition or results of operations.

 

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**Cautionary Statement for Purposes of the ‘Safe Harbor’Provisions of the Private Securities Litigation Reform Act of 1995**

 

Certainstatements in this Quarterly Report on Form 10-Q are “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995. Whenused in this Quarterly Report on Form 10-Q, the words “may,” “should,”“expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,”“intends,” “potential” or “continue” and similar expressions are generallyintended to identify forward-looking statements. Because these forward-lookingstatements involve risks and uncertainties, actual results could differ materiallyfrom those expressed or implied by these forward-looking statements. Thesestatements are only predictions. Although we believe that the expectationsreflected in the forward-looking statements are reasonable, we cannot guaranteefuture results, levels of activity, performance and/or achievements.

 

Forward-lookingstatements represent our expectations or beliefs concerning future events,including statements regarding our ability to reverse our recent revenuedeclines, our ability to realize the expected benefits from our restructuringinitiatives, the effect of the recent sale of the CRM products of a major CRMdeveloper on our business, our ability to derive profitable business from ouralliance with HCL, our ability to attract and retain customers, our ability toadjust the mix of our services to meet the needs of the market, our ability toadapt to rapidly changing technologies in the CRM industry, the ability of ourpartners to maintain competitive products, the impact of competition andpricing pressures from actual and potential competitors with greater financialresources, our ability to obtain large-scale consulting services agreements,the unpredictable client decision-making processes, changes in expectationsregarding the information technology consulting industry, our ability to hireand retain competent employees, our ability to make acquisitions underadvantageous terms and conditions, our success in integrating acquisitions intoour business and our culture and possible costs incurred related to theintegration, our ability to grow revenues from acquired companies, possiblechanges in collections of accounts receivable and notes receivable, our abilityto protect and reuse our intellectual property, our ability to continue to listour stock on the Nasdaq Market, changes in general economic conditions andinterest rates, and other factors identified in our filings with the Securitiesand Exchange Commission, including those identified in Exhibit 99.01 to thisQuarterly Report on Form 10-Q. We disclaim any intention or obligation toupdate or revise any forward-looking statements, whether as a result of newinformation, future events or otherwise.

 

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**PARTII.  OTHER INFORMATION**

 

Item 1.  Legal Proceedings

 

We are subject tovarious legal proceedings and claims that arise in the ordinary course ofbusiness.  We currently believe thatresolving these matters will not have a material adverse effect on ourbusiness, financial condition or results of operations.

 

Item 2.  Changes in Securities

 

None.

 

Item 3.  Defaults Upon Senior Securities

 

None.

 

Item 4.  Submission of Matters to a Vote of SecurityHolders

 

None.

 

Item 5.  Other Information

 

None.

 

Item 6.  Exhibits and Reports on Form 8-K

 

(a)        Exhibits:

 
| Exhibit No. |   | Document                                                                                                    |
|-------------|--------|-------------------------------------------------------------------------------------------------------------|
|        |   |                                                                                                        |
| 10.01       |   | Stock Purchase Agreement  between JAFCO America Ventures, Inc. and Zamba Corporation, dated April 30,  2002 |
| 99.01       |   | Cautionary Statement  Regarding Forward-Looking Statements                                                  |

 

 

(b)                       Reports on Form8-K:

 

OnApril 23, 2002, we filed a report on Form 8-K to report the following:

 

BetweenApril 10 and April 16, 2002, we entered into Stock Purchase Agreements with sixprivate investors, in which the investors purchased an aggregate of 200,000shares of our Series A Preferred Stock in NextNet Wireless, Inc.(“NextNet”).  The investors paid us anaggregate amount of $600,000 for the shares. All of the shares were sold at aper share price of $3.00.  As a resultof these transactions, the NextNet shares that we had sold to our chairman,Joseph B. Costello, in Stock Purchase Agreements dated February 26, 2002, asamended on March 25, 2002, and March 25, 2002, were valued at $3.00 per share.Mr. Costello paid us $700,000 pursuant to these two Stock Purchase Agreements.As a result of the $3.00 per share valuation, Mr. Costello will receive 233,333of our NextNet shares.  All NextNetshares sold to the six private investors and Mr. Costello pursuant to theseStock Purchase Agreements are subject to the right of first refusal on the partsof NextNet and the holders of the Series B Preferred Stock of NextNet.

 

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OnMay 8, 2002, we filed a report on Form 8-K to report the following:

 

BetweenApril 10 and April 30, 2002, we entered into Stock Purchase Agreements witheight private investors, in which the investors purchased on aggregate of279,996 shares of our Series A Preferred Stock in NextNet. We received anaggregate consideration of approximately $1,680,000 for the shares that we sold.  Of this amount, we have received $880,000,and we will receive approximately $400,000 on August 1, 2002 and $400,000 on September 1, 2002.  All of the shares were sold at a per shareprice of $6.00.  All NextNet shares soldto the eight private investors pursuant to these Stock Purchase Agreements aresubject to the right of first refusal on the parts of NextNet and the holdersof the Series B Preferred Stock of NextNet.

 

OnMay 9, 2002, we filed a report on form 8-K to report the following:

 

OnMay 2, 2002, we issued a press release announcing our financial results for thefirst quarter of 2002, which included the period from January 1, 2002 throughMarch 31, 2002.

 

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SIGNATURES

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the Registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 
|   | ZAMBA CORPORATION   |
|--------|---------------------|
|   |                |   |
|   | By:                 | /s/ Douglas M. Holden |   |
|   |                | Douglas M. Holden |
|   |                | President and Chief  Executive Officer |
|   |                |   |
|   |                |   |
|   | By:                 | /s/ Michael H. Carrel |   |
|   |                | Michael H. Carrel |
|   |                | Executive Vice President  and Chief Financial Officer |
|   |                | (Principal Financial and  Accounting Officer) |
|   |                |   |
|   | Dated: May 15, 2002 |

 

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