**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, 2003**                                                                                                                             |
|                                                                                                                                                                          |
| **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**

(Exact name 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 whetherthe Registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor 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   ý          NO   o

 

Indicate by check mark whetherthe Registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act).

YES   o          NO   ý

 

Indicate the number of sharesoutstanding of each of the issuer’s classes of common stock, as of May 9, 2003.

 

| **Class**                     |   | **Outstanding at  May 9, 2003** |
|-------------------------------|--------|---------------------------------|
| Common Stock, $0.01 par value |   | 38,831,434                      |

 

 

----

 

ZAMBA CORPORATION

 

INDEX

 

 
| PART I — Financial Information |
|-------------------------------------|
|                                |
| Item 1.                             | Financial Statements (Unaudited) |
|                                |
|                                | Consolidated Statements of Operations for  the  Three Months Ended March 31, 2003 and 2002 |
|                                |
|                                | Consolidated Balance Sheets as of  March 31, 2003 and December 31, 2002 |
|                                |
|                                | Consolidated Statements of Cash Flows for  the  Three Months Ended March 31, 2003 and 2002 |
|                                |
|                                | 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 |
|                                |
| Item 4.                             | Disclosure Controls and Procedures |
|                                |
| PART II — Other Information    |
|                                |
| Item 1.                             | Legal Proceedings |
|                                |
| Item  2.                            | Changes  in Securities and Use of Proceeds |
|                                |
| 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

----

 

**Part I.Financial Information**

 

**Item 1: Financial Statements**

 

**ZAMBACORPORATION**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(Unaudited)**

 

**(In thousands, except per share data)**

 
|                                                |   | **Three  months ended  March 31,** |       |
|-----------------------------------------------------|--------|------------------------------------|------------|
|                                                |   | **2003**                           |       | **2002** |   |
| **Revenues:**                                       |   |                               | ** ** |   | ** ** |
| **Professional  services**                          |   | **$**                              | **2,510**  | ** ** | **$** | **3,000** | ** ** |
| **Reimbursable  expenses**                          |   | **264**                            | ** ** | **235** | ** ** |
| **Total  revenue**                                  |   | **2,774**                          | ** ** | **3,235** | ** ** |
|                                                |   |                               |       |   |   |
| **Costs and  expenses:**                            |   |                               |       |   |   |
| **Project  and personnel costs**                    |   | **1,442**                          | ** ** | **3,321** | ** ** |
| **Reimbursable  expenses**                          |   | **264**                            | ** ** | **235** | ** ** |
| **Sales and  marketing**                            |   | **249**                            | ** ** | **859** | ** ** |
| **General  and administrative**                     |   | **782**                            | ** ** | **2,414** | ** ** |
| **Restructuring  and unusual charges**              |   | **—**                         | ** ** | **1,685** | ** ** |
| **Total  costs and expenses**                       |   | **2,737**                          | ** ** | **8,514** | ** ** |
|                                                |   |                               |       |   |   |
| **Income  (loss) from operations**                  |   | **37**                             | ** ** | **(5,279** | **)** |
|                                                |   |                               |       |   |   |
| **Other  income (expense):**                        |   |                               |       |   |   |
| **Gain on  sale of NextNet shares**                 |   | **1,853**                          | ** ** | **—** | ** ** |
| **Interest  income**                                |   | **—**                         | ** ** | **8** | ** ** |
| **Interest  expense**                               |   | **(27**                            | **)**      | **(65** | **)** |
| **Other  income (expense), net**                    |   | **1,826**                          | ** ** | **(57** | **)** |
|                                                |   |                               |       |   |   |
| **Income  (loss) before extraordinary item**        |   | **1,863**                          | ** ** | **(5,336** | **)** |
|                                                |   |                               |       |   |   |
| **Extraordinary  gain from extinguishment of debt** |   | **198**                            | ** ** | **—** | ** ** |
|                                                |   |                               |       |   |   |
| **Net income  (loss)**                              |   | **$**                              | **2,061**  | ** ** | **$** | **(5,336** | **)** |
|                                                |   |                               |       |   |   |
| **Basic net  income (loss) per share:**             |   |                               |       |   |   |
| **Income  (loss) before extraordinary item**        |   | **$**                              | **0.05**   | ** ** | **$** | **(0.14** | **)** |
| **Extraordinary  gain from extinguishment of debt** |   | **—**                         | ** ** | **—** | ** ** |
| **Basic net  income (loss) per share:**             |   | **$**                              | **0.05**   | ** ** | **$** | **(0.14** | **)** |
|                                                |   |                               |       |   |   |
| **Diluted  net income (loss) per share:**           |   |                               |       |   |   |
| **Income  (loss) before extraordinary item**        |   | **$**                              | **0.05**   | ** ** | **$** | **(0.14** | **)** |
| **Extraordinary  gain from extinguishment of debt** |   | **—**                         | ** ** | **—** | ** ** |
| **Diluted  net income (loss) per share**            |   | **$**                              | **0.05**   | ** ** | **$** | **(0.14** | **)** |
|                                                |   |                               |       |   |   |
| **Weighted  average shares outstanding:**           |   |                               |       |   |   |
| **Basic**                                           |   | **38,794**                         | ** ** | **37,014** | ** ** |
| **Diluted**                                         |   | **39,496**                         | ** ** | **37,014** | ** ** |

 

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

 

3

----

 

**ZAMBACORPORATION**

**CONSOLIDATED BALANCE SHEETS**

**(Unaudited)**

 

**(In thousands, except per share data)**

** **
|                                                                                                                                                                  |   | **March 31,  2003** |       | **December  31,  2002** |       |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|------------|-------------------------|------------|
| **ASSETS**                                                                                                                                                            |   |                |       |                    |       |
|                                                                                                                                                                  |   |                |       |                    |       |
| **Current  assets:**                                                                                                                                                  |   |                |       |                    |       |
| **Cash and  cash equivalents**                                                                                                                                        |   | **$**               | **961**    | ** **              | **$**      | **549** | ** ** |
| **Accounts  receivable, net**                                                                                                                                         |   | **1,299**           | ** ** | **662**                 | ** ** |
| **Unbilled  receivables**                                                                                                                                             |   | **140**             | ** ** | **470**                 | ** ** |
| **Prepaid  expenses and other current assets**                                                                                                                        |   | **204**             | ** ** | **507**                 | ** ** |
| **Total  current assets**                                                                                                                                             |   | **2,604**           | ** ** | **2,188**               | ** ** |
|                                                                                                                                                                  |   |                |       |                    |       |
| **Property  and equipment, net**                                                                                                                                      |   | **488**             | ** ** | **531**                 | ** ** |
| **Other  assets**                                                                                                                                                     |   | **92**              | ** ** | **102**                 | ** ** |
| **Total  assets**                                                                                                                                                     |   | **$**               | **3,184**  | ** **              | **$**      | **2,821** | ** ** |
|                                                                                                                                                                  |   |                |       |                    |       |   |   |
| **LIABILITIES AND STOCKHOLDERS’ DEFICIT**                                                                                                                        |   |                |       |                    |       |
|                                                                                                                                                                  |   |                |       |                    |       |
| **Liabilities:**                                                                                                                                                      |   |                |       |                    |       |
| **Line of  credit**                                                                                                                                                   |   | **$**               | **340**    | ** **              | **$**      | **298** | ** ** |
| **Short-term  loan**                                                                                                                                                  |   | **—**          | ** ** | **1,000**               | ** ** |
| **Current  installments of long-term debt**                                                                                                                           |   | **6**               | ** ** | **266**                 | ** ** |
| **Accounts  payable**                                                                                                                                                 |   | **137**             | ** ** | **584**                 | ** ** |
| **Accrued  expenses**                                                                                                                                                 |   | **1,965**           | ** ** | **2,593**               | ** ** |
| **Deferred  revenue**                                                                                                                                                 |   | **115**             | ** ** | **57**                  | ** ** |
| **Deferred  gain on sale of NextNet shares**                                                                                                                          |   | **750**             | ** ** | **25**                  | ** ** |
| **Total  current liabilities**                                                                                                                                        |   | **3,313**           | ** ** | **4,823**               | ** ** |
|                                                                                                                                                                  |   |                |       |                    |       |
| **Long-term  debt, less current installments**                                                                                                                        |   | **—**          | ** ** | **164**                 | ** ** |
| **Other  long-term liabilities**                                                                                                                                      |   | **137**             | ** ** | **164**                 | ** ** |
| **Commitments  and contingencies**                                                                                                                                    |   |                |       |                    |       |
| **Total  liabilities**                                                                                                                                                |   | **3,450**           | ** ** | **5,151**               | ** ** |
| **Stockholders'  deficit:**                                                                                                                                           |   |                |       |                    |       |
| **Common  stock, $0.01 par value, 120,000 shares authorized,38,831 and 38,823 shares  issued and outstanding at  March 31, 2003 and December 31, 2002, respectively** |   | **388**             | ** ** | **388**                 | ** ** |
| **Additional  paid-in capital**                                                                                                                                       |   | **86,064**          | ** ** | **86,060**              | ** ** |
| **Accumulated  deficit**                                                                                                                                              |   | **(86,718**         | **)**      | **(88,778**             | **)**      |
| **Total  stockholders’ deficit**                                                                                                                                 |   | **(266**            | **)**      | **(2,330**              | **)**      |
|                                                                                                                                                                  |   |                |       |                    |       |
| **Total  liabilities and stockholders’ deficit**                                                                                                                 |   | **$**               | **3,184**  | ** **              | **$**      | **2,821** | ** ** |

 

**Theaccompanying notes are an integral part of the consolidated financialstatements.**

 

4

----

 

**ZAMBACORPORATION**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Unaudited)**

** **
|                                                                                      |   | **Three  months ended  March 31,** |       |
|-------------------------------------------------------------------------------------------|--------|------------------------------------|------------|
| **(In  thousands)**                                                                       |   | **2003**                           |       | **2002** |   |
|                                                                                      |   |                               |       |   |   |
| **Cash flows  from operating activities:**                                                |   |                               |       |   |   |
| **Net income  (loss)**                                                                    |   | **$**                              | **2,061**  | ** ** | **$** | **(5,336** | **)** |
| **Adjustments  to reconcile net income (loss) to net cash used in operating activities:** |   |                               |       |   |   |
| **Depreciation  and amortization**                                                        |   | **83**                             | ** ** | **147** | ** ** |
| **Provision  for bad debts**                                                              |   | **—**                         | ** ** | **20** | ** ** |
| **Gain on  disposal of fixed assets**                                                     |   | **(5**                             | **)**      | **—** | ** ** |
| **Gain on  sale of NextNet shares**                                                       |   | **(1,853**                         | **)**      | **—** | ** ** |
| **Extraordinary  gain on extinguishment of debt**                                         |   | **(198**                           | **)**      | **—** | ** ** |
| **Changes in  operating assets and liabilities:**                                         |   |                               |       |   |   |
| **Accounts  receivable**                                                                  |   | **(637**                           | **)**      | **168** | ** ** |
| **Unbilled  receivables**                                                                 |   | **330**                            | ** ** | **76** | ** ** |
| **Notes  receivable**                                                                     |   | **—**                         | ** ** | **535** | ** ** |
| **Prepaid  expenses and other assets**                                                    |   | **280**                            | ** ** | **86** | ** ** |
| **Accounts  payable**                                                                     |   | **(448**                           | **)**      | **(16** | **)** |
| **Accrued  expenses and other long-term liabilities**                                     |   | **(637**                           | **)**      | **1,226** | ** ** |
| **Deferred  revenue**                                                                     |   | **57**                             | ** ** | **60** | ** ** |
| **Net cash  used in operating activities**                                                |   | **(967**                           | **)**      | **(3,034** | **)** |
|                                                                                      |   |                               |       |   |   |
| **Cash flows  from investing activities:**                                                |   |                               |       |   |   |
| **Purchase of  property and equipment**                                                   |   | **(3**                             | **)**      | **(30** | **)** |
| **Proceeds  from sale of NextNet shares**                                                 |   | **750**                            | ** ** | **700** | ** ** |
| **Proceeds  from sale of equipment**                                                      |   | **6**                              | ** ** | **1** | ** ** |
| **Notes  receivable - related parties**                                                   |   | **—**                         | ** ** | **220** | ** ** |
| **Net cash  provided by investing activities**                                            |   | **753**                            | ** ** | **891** | ** ** |
|                                                                                      |   |                               |       |   |   |
| **Cash flows  from financing activities:**                                                |   |                               |       |   |   |
| **Line of  credit, net**                                                                  |   | **42**                             | ** ** | **(250** | **)** |
| **Proceeds  from short-term loan**                                                        |   | **750**                            | ** ** | **—** | ** ** |
| **Proceeds  from sale of common stock**                                                   |   | **1**                              | ** ** | **1,701** | ** ** |
| **Proceeds  from exercises of stock options**                                             |   | **—**                         | ** ** | **13** | ** ** |
| **Payments  of long-term debt**                                                           |   | **(167**                           | **)**      | **(85** | **)** |
| **Net cash  provided by financing activities**                                            |   | **626**                            | ** ** | **1,379** | ** ** |
|                                                                                      |   |                               |       |   |   |
| **Net  increase (decrease) in cash and cash equivalents**                                 |   | **412**                            | ** ** | **(764** | **)** |
| **Cash and  cash equivalents, beginning of period**                                       |   | **549**                            | ** ** | **1,326** | ** ** |
| **Cash and  cash equivalents, end of period**                                             |   | **$**                              | **961**    | ** ** | **$** | **562** | ** ** |
|                                                                                      |   |                               |       |   |   |
| **Supplemental  Schedule for Disclosures of Cash Flow Information:**                      |   |                               |       |   |   |
|                                                                                      |   |                               |       |   |   |
| **Cash paid  during the period for interest**                                             |   | **$**                              | **26**     | ** ** | **$** | **75** | ** ** |
|                                                                                      |   |                               |       |   |   |
| **Non-cash  investing and financing activity:**                                           |   |                               |       |   |   |
|                                                                                      |   |                               |       |   |   |
| **Conversion  of note payable into sale of NextNet shares**                               |   | **$**                              | **1,750**  | ** ** | **$** | **—** | ** ** |
| **Conversion  of long-term debt into sale of NextNet shares**                             |   | **$**                              | **71**     | ** ** | **$** | **—** | ** ** |

 

**Theaccompanying notes are an integral part of the consolidated financialstatements.**

 

5

----

 

ZAMBA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note A.  Basis of Presentation:

 

The unauditedconsolidated financial statements of ZAMBA Corporation as of March 31, 2003,and for the three month periods ended March 31, 2003 and 2002, reflect alladjustments (which include only normal recurring adjustments, except asdisclosed in the footnotes) necessary, in the opinion of management, to fairlystate our financial position as of March 31, 2003, and our results ofoperations and cash flows for the reported periods.  The results of operations for any interim period are notnecessarily indicative of the results to be expected for any other interimperiod or for the full fiscal year.  Theyear-end balance sheet data was derived from audited financial statements, butdoes not include all disclosures required by accounting principles generallyaccepted in the United States of America. Certain prior year amounts have been reclassified to conform with the2003 presentation.  These financialstatements should be read in conjunction with our audited consolidatedfinancial statements and related notes for the year ended December 31, 2002,which were included in our 2002 Annual Report on Form 10-K.

 

Note B.  Liquidity:

 

As of March 31, 2003, we had a negative working capital of $709,000,and a stockholder’s deficit of $266,000. To partially fund our operations, we received $1.5 million as a resultof investing activity between January 1, 2003 and March 31, 2003 byselling some of the NextNet Wireless, Inc. Series A Preferred Stock weown.  Transactions between January 1,2003 and March 31, 2003 were as follows:

 

We received$750,000 in the first quarter of 2003 as part of a loan agreement with EntrxCorporation (“Entrx”).  This notepayable was converted into shares of our NextNet Series A PreferredStock on March 31, 2003.  SeeNote J for additional discussion.

 

We alsoreceived $750,000 in the first quarter of 2003 when we sold shares of NextNetSeries A Preferred Stock to two private investors.  These investors received 177,306 shares of our NextNet Series APreferred Stock at an average price of $4.23 per share.  See note H for additional discussion.

 

We partly fund our operations through our AccountsReceivable Purchase Agreement withSilicon Valley Bank.  Althoughthere are no financial covenants in the agreement with Silicon Valley Bank, itmay still declare us to be in default in certain circumstances.  This facility expires on July 29, 2003.  See Note G for additional discussion.

 

Our ability to continue as a going concern depends upon our ability tocontinue to sustain profitability, access our borrowing facility with our bank,and obtain any additional funding that may be needed.

 

6

----

 

Note C. Selected Balance SheetInformation:

 
| **(in thousands)**                              |   | **March 31, 2003** |   | **December 31, 2002** |   |
|-------------------------------------------------|--------|--------------------|--------|-----------------------|--------|
|                                            |   |               |   |                  |   |
| Accounts receivable, net:                       |   |               |   |                  |   |
| Accounts receivable                             |   | $                  | 1,443  |                  | $      | 806 |   |
| Less allowance for doubtful  accounts           |   | (144               | )      | (144                  | )      |
| Totals                                          |   | $                  | 1,299  |                  | $      | 662 |   |
|                                            |   |               |   |                  |   |
| Property and equipment,  net:                   |   |               |   |                  |   |
| Computer equipment                              |   | $                  | 778    |                  | $      | 802 |   |
| Furniture and equipment                         |   | 299                |   | 286                   |   |
| Leasehold improvements                          |   | 60                 |   | 60                    |   |
| Totals                                          |   | 1,137              |   | 1,148                 |   |
| Less accumulated  depreciation and amortization |   | (649               | )      | (617                  | )      |
| Totals                                          |   | $                  | 488    |                  | $      | 531 |   |

 

Note D.  NetIncome (Loss) Per Share:

 

Basic income (loss) pershare is computed based on the weighted average number of common sharesoutstanding.  Diluted income (loss) pershare is computed based onthe weighted average number of common shares outstanding adjusted by the numberof additional shares that would have been outstanding had the potentiallydilutive common shares been issued. Potentially dilutive shares of common stock include stock options.  A total of 702,000 and 0 additional shareswere included in the diluted income (loss) per share calculation at March 31,2003 and 2002, respectively. 

 

Note E.  RecentAccounting Standards:

 

In June 2002, theFinancial Accounting Standards Board (FASB) issued SFAS No. 146 “Accounting forCosts Associated with Exit or Disposal Activities.”  SFAS No. 146 supersedes EITF No. 94-3.  The principal difference between SFAS No. 146 and EITF No. 94-3relates to when an entity can recognize a liability related to exit or disposalactivities.  SFAS No. 146 requires a liabilitybe recognized for a cost associated with an exit or disposal activity when theliability is incurred.  EITF No. 94-3allowed a liability related to an exit or disposal activity, to be recognizedat the date an entity commits to an exit plan. The provisions of SFAS No. 146 became effective on January 1, 2003.Accordingly, we will apply this standard to any exit or disposal activitiesinitiated after January 1, 2003.  Weincurred no exit or disposal activities after January 1, 2003, so the adoptionof SFAS No. 146 had no effect on our financial position or results ofoperations.

 

In January 2003, the FASBissued Statement of Financial Accounting Standards No. 148, “Accounting forStock-Based Compensation - Transition and Disclosure” (“SFAS 148”).  SFAS 148 amends FASB Statement of FinancialAccounting Standards No. 123, “Accounting for Stock-Based Compensation”  (“SFAS 123”) to provide alternative methods of transition for avoluntary change to the fair value based method of accounting for stock-based employeecompensation.  In addition, SFAS 148amends the disclosure requirements of SFAS 123 to require prominent disclosuresin both annual and interim financial statements of the method of accounting forstock-based employee compensation and the effect of the method used on reportedresults.  SFAS 148 is effective forfiscal years beginning after December 15, 2002 and was adopted by ZAMBA for allperiods presented herein.  ZAMBA did notchange to the fair value based method of accounting for stock-based employeecompensation; therefore, adoption of SFAS 148 will only impact disclosures, notthe financial results, of ZAMBA.

 

7

----

 

Note F.   Restructuring and Unusual Charges:

 

In the firstquarter of 2002, we incurred unusual charges of $1.69 million for facility andemployment matters.  Included in thisamount was a $1.34 million chargerelated to closing our Campbell, California, and Colorado Springs, Coloradofacilities.  These transactions haveresulted in annual cost savings of $1.0 million.  In addition, a $350,000 charge was taken for severance payrelating to reduced headcount, including the separation of three vicepresidents, in the first quarter of 2002. These headcount reductions have resulted in annual savings of $3.5million.

 

In the secondquarter of 2002, we incurred unusual charges of $1.64 million for facility andnon-cash compensation matters. Included in this amount was a $1.19 millioncharge for facility closings and lease termination costs.  The facility charges included $190,000 forclosing the Boston, Massachusetts, facility, $290,000 for reducing the amountof space leased in Minneapolis, Minnesota, and $713,000 for increasing theaccrual for our St. Paul, Minnesota and Campbell, California facilities toamounts consistent with buy-out offers made by our landlords.  These charges have resulted in additionalannual savings of $1.2 million.  We alsoincurred a $443,000 non-cash compensation charge arising out of the exercise byPaul Edelhertz, a member of our board of directors, of his right to assign tous an aggregate of 250,000 shares of our common stock in exchange for ourcancellation of a promissory note issued to us by Mr. Edelhertz bearing aprincipal balance of $500,000 and accrued interest through the date ofcancellation of $43,250.  Thistransaction relates to an agreement dated December 26, 2000, as amended onAugust 2, 2001.

 

A summary ofrestructuring and unusual charge activity through March 31, 2003 is as follows:

 
|                                                                 |   | **Facility Closings  and Lease  Termination Costs** |    | **Severance and  Other Employee  Related Costs** |   | **Other** |   | **Total**  |    |
|----------------------------------------------------------------------|--------|-----------------------------------------------------|---------|--------------------------------------------------|--------|-----------|--------|------------|---------|
|                                                                 |   |                                                |    |                                             |   |      |   |       |    |
| Fourth Quarter  2000 Provision                                       |   | $                                                   | 240,000 |                                             | $      | 307,000   |   | $          | 206,000 |   | $ | 753,000 |   |
| 2000 Utilized                                                        |   | —                                              |    | (137,000                                         | )      | (206,000  | )      | (343,000   | )       |
| Balance as of December  31, 2000                                     |   | 240,000                                             |    | 170,000                                          |   | —    |   | 410,000    |    |
| Second Quarter  2001 Provision                                       |   | 1,173,000                                           |    | 900,000                                          |   | 115,000   |   | 2,188,000  |    |
| Additional  facility related accruals in the fourth quarter of 2001  |   | 175,000                                             |    | —                                           |   | —    |   | 175,000    |    |
| 2001 Utilized                                                        |   | (786,000                                            | )       | (1,070,000                                       | )      | (115,000  | )      | (1,971,000 | )       |
| Balance as of  December 31, 2001                                     |   | 802,000                                             |    | —                                           |   | —    |   | 802,000    |    |
| First Quarter  2002 Provision                                        |   | 1,335,000                                           |    | 350,000                                          |   | —    |   | 1,685,000  |    |
| Second Quarter  2002 Provision                                       |   | 1,193,000                                           |    | —                                           |   | 443,000   |   | 1,636,000  |    |
| Additional  severance related accruals in the second quarter of 2002 |   | —                                              |    | 100,000                                          |   | —    |   | 100,000    |    |
| 2002 Utilized                                                        |   | (1,804,000                                          | )       | (315,000                                         | )      | (443,000  | )      | (2,562,000 | )       |
| Balance as of  December 31, 2002                                     |   | 1,526,000                                           |    | 135,000                                          |   | —    |   | 1,661,000  |    |
| Q1 2003  Utilized                                                    |   | (582,000                                            | )       | —                                           |   | —    |   | (582,000   | )       |
| Balance as of  March 31, 2003                                        |   | $                                                   | 944,000 |                                             | $      | 135,000   |   | $          | —  |   | $ | 1,079,000 |   |

 

Note G.   Line of Credit:

 

On July 29, 2002,we entered into an Accounts Receivable Purchase Agreement with Silicon ValleyBank to replace a prior revolving credit facility we had established withSilicon Valley Bank.  This agreemententitles us to borrow up to a maximum of $2.0 million based on eligiblereceivables, and is secured by virtually all of our assets.  Borrowings under this agreement bearinterest at a monthly rate of 1% of the average daily balance outstandingduring the period.  Additionally, oneach reconciliation date, we pay an administrative fee equal to 0.25% of theface amount of each receivable purchased by Silicon Valley Bank during thatreconciliation period.  Although thereare no financial covenants in the new agreement with Silicon Valley Bank, theymay still declare default in certain circumstances, including our default underany leases or contracts.  If SiliconValley Bank decides not to purchase receivables from us, our ability to fundour operations could be materially harmed.

 

8

----

 

This facilityexpires on July 29, 2003.  The amountoutstanding under this agreement was $340,000 at March 31, 2003.

 

The AccountsReceivable Purchase Agreement replaced a secured revolving credit facility thatwe established with Silicon Valley Bank on February 27, 2001, and amended onAugust 2, 2001 and December 31, 2001. The secured revolving credit facilityentitled us to borrow up to a maximum of $5.0 million based on eligiblecollateral.  Borrowings under this lineof credit bore interest at the bank’s prime rate plus 2.0%, and were payablemonthly.  The amended agreementrequired, among other things, that we comply with minimum tangible net worthand profitability covenants. This facility was to expire on December 31, 2002,but was replaced by the Accounts Receivable Purchase Agreement.  Amounts outstanding under the revolving creditfacility were converted to amounts outstanding under the Accounts ReceivablePurchase Agreement.

 

Note H.   Sales of Investments:

 

In the firstquarter of 2003, we entered into transactions with private investors in whichwe sold portions of our equity holdings in NextNet Wireless, Inc.  Our chairman, Joseph B. Costello, is alsothe chairman of NextNet. Another of our directors, Dixon Doll, is also adirector and a shareholder of NextNet. Additionally, another director of Zamba, Sven Wehrwein, has been aconsultant for NextNet.  There have beenno other relationships or business transactions between the two companies sinceJanuary 1, 2000.

 

On January 27,2003, we entered into an agreement to pay an unrelated third party $165,000 andtransfer 16,667 shares of NextNet Series A Preferred Stock we own to the thirdparty’s family trust in exchange for a cancellation of approximately $434,000in principal and accrued interest that we owed him pursuant to a debtobligation.  As a result, we recorded anextraordinary gain on debt extinguishment of approximately $198,000 and a gainon sale of NextNet shares of $71,000 in the first quarter of 2003 in respect tothis agreement.

 

On February17, 2003, we sold 177,306 shares of NextNet Series A Preferred Stock for$750,000.  We recorded a deferred gainon sale of investment in the first quarter of 2003 when we received the cashfrom these transactions. A gain on sale of investment will be recorded when theshares are transferred to the private investors, which will occur in the secondquarter of 2003.  In connection withthese sales, we issued a warrant to an investor affiliated with a priorpurchaser of NextNet shares to purchase 125,000 additional shares of NextNetSeries A Preferred Stock owned by us at $6.00 per share, any time prior to theclose of business on May 17, 2004.

 

We transferred413,712 shares of our NextNet Wireless stock to Entrx Corporation onMarch 31, 2003, pursuant to a loan agreement with Entrx on November 5,2002.  See Note J for more informationregarding our transaction with Entrx.

 

All NextNetshares that we sell are subject to the right of first refusal on the parts ofNextNet and the holders of the Series B Preferred Stock of NextNet.

 

As of March 31, 2003, we owned approximately 700,000 shares of NextNetSeries A Preferred Stock, or approximately 6% of the outstanding equity inNextNet.  Of our remaining shares, wehave issued three warrants to two private investors to purchase up to 148,337additional shares of our NextNet Series A Preferred Stock from us at $6.00 pershare.  A warrant to purchase up to125,000 shares expires on May 17, 2004, and warrants to purchase 23,337sharesexpires on December 31, 2005.

 

Note I. Legal Matters

 

We are subject to variouslegal proceedings and claims that arise in the ordinary course of business.

 

On August 5,2002, our former president and CEO, Doug Holden, notified us that he believedwe breached his severance agreement with us following the separation of hisemployment.  Mr. Holden requestedcontinued payroll and benefits and continued vesting of stock options for sixmonths from June 27, 2002, the date of his separation.  Mr. Holden’s annualized salary at the timeof his separation was $240,000. Therefore, the value of Mr. Holden’s claims isapproximately $120,000, plus the value of his benefits and continued vesting of

 

9

----

 

his options. We believe that we have valid defenses to Mr. Holden’s claims and/orthat Mr. Holden is not entitled to the items he is requesting.  The timing and ultimate resolution of Mr.Holden’s claims are uncertain at this time.

 

We are alsosubject to other various legal proceedings and claims that we do not believeare material either separately or in the aggregate.

 

Note J.   Loan Agreement with Entrx Corporation

 

On November 5,2002, we entered into a loan agreement with Entrx Corporation, under whichEntrx agreed to lend us up to $2.5 million in three separate advances.  We received the first advance of $1 millionon November 4, 2002.  On February19, 2003, this loan agreement was amended. In connection with the amendment, we received the second advance of$750,000 but waived the third advance. Entrx also waived its rights to convert all outstanding advances intoshares of our common stock, and terminated an option under the original loanagreement to purchase additional shares of our NextNet.  Entrx also agreed to waive interest chargesaccruing after December 2002.

 

Entrx elected to convert theprincipal amount of the loan into 413,712 shares of NextNet Wireless Series APreferred Stock we own on March 31, 2003. The conversion price was $4.23 pershare, which was the per share price (on a common share equivalentbasis, without giving effect to differences in rights or to anti-dilutionprovisions or any other purchase price adjustments set forth in the NextNetloan agreement) that NextNet agreed to receive for a sale of other preferredstock.  If NextNet sells additional preferred stock in an amountthat is at least one million dollars ($1,000,000.00) before June 30, 2003, at aprice lower than $4.23 per share (on a common share equivalent basis, withoutgiving effect to differences in rights or to anti-dilution provisions or anyother purchase price adjustments set forth in the NextNet loan agreement), weare required to issue additional shares to Entrx to give it the benefit of suchlower per share price.

 

Note K.  Major Customers

 

A portion ofour revenues have been derived from significant customers for the three monthsended March 31, 2003 and 2002 as follows:

 
|       |   | **Three Months  Ended March 31,** |   |
|------------|--------|-----------------------------------|--------|
|       |   | **2003**                          |   | **2002** |   |
| Customer 1 |   | 28                                | %      | 3 | % |
| Customer 2 |   | 18                                | %      | 8 | % |
| Customer 3 |   | 13                                | %      | 14 | % |
| Customer 4 |   | 6                                 | %      | 16 | % |
| Customer 5 |   | 6                                 | %      | 11 | % |
| Customer 6 |   | 1                                 | %      | 11 | % |

 

Note L.  Stockholders’ Equity

 

We have chosento account for stock-based compensation using the intrinsic value methodprescribed in Accounting Principles Board Opinion No. 25, “Accounting for StockIssued to Employees,” and related interpretations (APB No. 25).  We account for stock-based compensation tonon-employees using the fair value method prescribed by Statements of FinancialAccounting Standards (SFAS) No. 123. Accordingly, compensation costs for stock options granted to employeesare measured as the excess, if any, of the value of our stock at the date ofthe grant over the amount an employee must pay to acquire the stock.  Compensation cost for stock options grantedto non-employees is measured as the fair value of the option at the date ofgrant.  Such compensation costs, if any,are amortized on a straight-line basis over the underlying option vestingterms.

 

10

----

 

No compensation cost hasbeen recognized for stock options granted to employees or directors under our1989 Stock Option Plan, 1993 Equity Incentive Plan, 1993 Directors Option Plan,1997 Stock Option Plan, 1998 Non-Officers Plan, 1999 Non-Officers Plan, 2000Non-Officers Plan, or 2000 Non-Qualified Plan (collectively referred to as the“Plans”).  Had compensation cost for thePlans been determined based on the fair value of options at the grant date forawards in the three months ended March 31, 2003 and 2002, our net income (loss)and net income (loss) per share would have decreased to the pro forma amountsindicated below:

 

(Inthousands, except per share amounts)

 
|                                                                                                                                         |   | **Three months  ended March 31,** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                                                                                         |   | **2003**                          |   | **2002** |   |
|                                                                                                                                         |   |                              |   |   |   |
| Net income  (loss), as reported                                                                                                              |   | $                                 | 2,061  |   | $ | (5,336 | ) |
| Deduct total  stock based employee compensation expense determined under fair value based  method for all awards, net of related tax effects |   | (426                              | )      | (1,900 | ) |
|                                                                                                                                         |   |                              |   |   |   |
| Pro forma net  income (loss)                                                                                                                 |   | $                                 | 1,635  |   | $ | (7,236 | ) |
|                                                                                                                                         |   |                              |   |   |   |
| Earnings per  share:                                                                                                                         |   |                              |   |   |   |
| Basic - as  reported                                                                                                                         |   | $                                 | 0.05   |   | $ | (0.14 | ) |
| Basic - pro  forma                                                                                                                           |   | $                                 | 0.04   |   | $ | (0.20 | ) |
|                                                                                                                                         |   |                              |   |   |   |
| Diluted - as  reported                                                                                                                       |   | $                                 | 0.05   |   | $ | (0.14 | ) |
| Diluted - pro  forma                                                                                                                         |   | $                                 | 0.04   |   | $ | (0.20 | ) |

 

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

 

**Overview**

 

ZAMBA Corporation is acustomer care services company.  We helpour clients be more successful in acquiring, servicing, and retaining theircustomers.  Having served over 300 clients, ZAMBA isfocused exclusively on customer-centric services by leveraging best practicesand best-in-class technologies to enable insightful, consistent interactionsacross all customer touch points.  We providestrategy and business process consulting, as well as customization and systemsintegration for software applications, which we call “packages,” that ourclients purchase from third parties.  Based on our expertise and experience, we havecreated a framework of interdependent processes and technologies to help ourclients, including strategy, analytics and marketing, contact center, contentand commerce, field sales, field service, and enterprise integration.

 

Our revenues and earningshistorically have fluctuated from quarter-to-quarter based on the number, size,and scope of projects in which we are engaged, the contractual terms and degreeof completion of such projects, any delays incurred in connection with aproject, the adequacy of provisions for losses, the accuracy of estimates ofresources required to complete ongoing projects, general economic conditions,and other factors.  Consequently, theresults of operations described in this report may not be indicative of resultsto be achieved in future periods.  Inaddition, revenues from a large client may constitute a significant portion ofour total revenues in any particular quarter.

 

11

----

 

**Resultsof Operations**

 

**Three months ended March 31, 2003, comparedto the three months ended March 31, 2002**

 

*Net Revenues*

Revenues decreasedapproximately 14% to $2.77 million in the first quarter of 2003 compared to$3.24 million in the first quarter of 2002. Revenues before reimbursements decreased approximately 16% to $2.51million in the first quarter of 2003 compared to $3.00 million in the firstquarter of 2002.  The decrease was dueprimarily to the continued reduction in the demand for information technologyconsulting services, associated with a general slowdown in the economy. Withthis economic slowdown, many companies have either delayed decisions oninformation technology consulting projects, or have cancelled the projectsaltogether, resulting in an industry-wide decrease in services revenue.  In conjunction with the decrease in ourrevenues, our billable headcount decreased to 48 as of March 31, 2003, comparedto 97 as of March 31, 2002.

 

*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 providingclient service.  Project costs were$1.44 million or approximately 52% of net revenues in the first quarter of 2003compared to $3.32 million or approximately 103% of net revenues in the firstquarter of 2002.  The decrease inproject costs in dollar and percentage of revenue terms between these periodswas due primarily to the decrease in our headcount from 97 billable consultantsas of March 31, 2002, to 48 billable consultants as of March 31, 2003, whichimproved our overall utilization.

 

*Reimbursable Expenses*

Reimbursable expenses consist of out-of-pocket expenses incurred whileproviding services that are reimbursed by our clients.  Pursuant to Financial Accounting StandardsBoard Staff Announcement (Topic No. D-103), reimbursable expenses are separateline items in both revenue and cost of revenue.

 

*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 $249,000or approximately 9% of net revenues in the first quarter of 2003, compared to $859,000or approximately 27% of net revenues in the first quarter of 2002.  The decrease between these periods was dueto a reduction in the number of sales and marketing personnel, as well as lowercommission expenses resulting from the decrease in revenue.

 

*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 $782,000 or approximately 28%of net revenues in the first quarter of 2003, compared to $2.41 million orapproximately 75% of net revenues in the first quarter of 2002. The overalldecrease in costs was primarily due to cost savings of $602,000 in office andequipment lease expenses, $213,000 in salaries, and $184,000 from a gain due totermination of a lease for office furniture and settlement of relatedlitigation.

 

*Interest Income*

Interestincome was $0 in the first quarter of 2003 compared to $8,000 in the firstquarter of 2002.  The decrease is due todecreases in our cash and investment accounts, which were used in operating andinvesting activities.

 

*Interest Expense*

Interestexpense was $27,000 in the first quarter of 2003 compared to $65,000 in thefirst quarter of 2002.  The decrease wasdue to a decrease in our borrowings related to the credit facility with SiliconValley Bank and the payoff of a majority of our long-term debt in the firstquarter of 2003.

 

12

----

 

*Gain on Sale of NextNet Shares*

Gain on sale of NextNet shares was $1,853,000 in the first quarter of2003 compared to $0 in the first quarter of 2002. This represents a gain fromour sales of a total of approximately 436,000 shares of NextNet Series APreferred Stock, as described in Note H of our Notes to Consolidated FinancialStatements.  We will also record a gainon sale of NextNet shares of $750,000 in the second quarter of 2003 from salesof approximately 177,000 shares of NextNet Series A Preferred Stock, as describedin Note H of our Notes to Consolidated Financial Statements.

 

ExtraordinaryGain on Extinguishment of Debt

Extraordinary gain on extinguishment of debt was $198,000 in the firstquarter of 2003 compared to $0 in the first quarter of 2002.  This represents a gain from an agreement topay off our long-term debt owed to a third party, as described in Note K of ourNotes to Consolidated Financial Statements.

 

*Income Taxes*

We have netoperating loss carryforwards to utilize against earnings in the future, andtherefore, we have not recognized a tax charge on our net income in the firstquarter of 2003.  Because we areuncertain as to whether we will have taxable earnings in the future, we havenot reflected any benefit of additional net operating loss carryforwards in theaccompanying unaudited consolidated financial statements.

 

*Net Income (Loss)*

Our net incomefor the quarter ended March 31, 2003 was $2.06 million, or $0.05 per share,compared to a net loss for the quarter ended March 31, 2002 of $5.34 million,or $0.14 per share.  Our net income fromoperations for the quarter ended March 31, 2003 was $37,000, compared to a netloss from operations for the quarter ended March 31, 2002 of $5.28 million.

 

**Critical Accounting Policies**

 

We have identified thepolicies below as critical to our business operations and the understanding ofour results of operations.  The impactand 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.

 

Our critical accounting policies are as follows:

•                  Revenue Recognition;

•                  Allowance for Doubtful Accounts; and

•                  Investment in NextNet Wireless, Inc.

 

For a detailed discussion of the application of these and other accountingpolicies, see Note 1 of the notes to the consolidated financial statements inour 2002 Annual Report on Form 10-K.

 

***Liquidity and Capital Resources***

 

At March 31, 2003, we hadapproximately $961,000 in cash and cash equivalents, compared to $549,000 atDecember 31, 2002. As of March 31, 2003, we had no significant capital spendingor purchase commitments.  As of March31, 2003, we had a negative working capital of $709,000, and a stockholder’sdeficit of $266,000.

 

Cash used in operatingactivities was $967,000 for the three months ended March 31, 2003 and resultedprimarily from an increase in accounts receivable of $637,000, a decrease inaccrued expenses of $637,000, and a decrease in accounts payable of $448,000,which was offset by a gain before depreciation and amortization, non-cashcompensation, gain on sale of investment in NextNet, and extraordinary gain onextinguishment of debt of

 

13

----

 

$87,000, a decrease in unbilled receivables of$330,000 and a decrease in prepaid expenses and other assets of $280,000.  Cash used in operating activities was $3.03million for the three months ended March 31, 2002 and resulted primarily from aloss before depreciation and amortization of $5.19 million, which was offset by a increase in accrued expenses of$1.23 million and a decrease in notes receivable of $535,000.

 

Cash provided frominvesting activities was $753,000 for the three months ended March 31, 2003,and resulted primarily from proceeds of $750,000 from the sale of a portion ofour NextNet shares.  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 receipts of $220,000 from notes receivable – relatedparties.

 

Cash provided byfinancing activities was $626,000 for the three months ended March 31, 2003 andconsisted primarily of $750,000 in cash received from proceeds of a notepayable, offset by payments of long-term debt of $167,000.  Cash provided by financing activities was$1.38 million for the three months ended March 31, 2002 and consisted primarilyof cash received from the sale of common stock of $1.70 million, offset by adecrease of $250,000 in borrowings under our line of credit.

 

Future payments due under debtand lease obligations as of March 31, 2003, are as follows (in thousands):

 
| **Year  Ending  December 31,** |   | **Accounts  Receivable  Purchase  Agreement** |   | **Notes  Payable** |   | **Non  Cancelable  Operating  Leases** |   | **Accrued  Lease  Settlements** |   | **Total** |   |
|--------------------------------|--------|-----------------------------------------------|--------|--------------------|--------|----------------------------------------|--------|---------------------------------|--------|-----------|--------|
| 2003                           |   | $                                             | 340    |               | $      | 6                                      |   | $                               | 496    |      | $      | 698 |   | $ | 1,540 |   |
| 2004                           |   | —                                        |   | —             |   | 556                                    |   | —                          |   | 556       |   |
| 2005                           |   | —                                        |   | —             |   | 388                                    |   | —                          |   | 388       |   |
| Total                          |   | $                                             | 340    |               | $      | 6                                      |   | $                               | 1,440  |      | $      | 698 |   | $ | 2,484 |   |

 

On July 29, 2002,we entered into an Accounts Receivable Purchase Agreement with Silicon ValleyBank to replace our prior bank line of credit. This agreement entitles us toborrow up to a maximum of $2.0 million based on eligible receivables, and issecured by virtually all of our assets. Borrowings under this agreement bear interest at a monthly rate of 1% ofthe average daily balance outstanding during the period.  Additionally, on each reconciliation date,we pay an administrative fee equal to 0.25% of the face amount of eachreceivable purchased by Silicon Valley Bank during that reconciliationperiod.  This facility expires on July29, 2003.

 

We received$750,000 in additional funding in the first quarter of 2003 from EntrxCorporation, to fund our working capital needs.  This funding was for the second installment of a loan agreementunder which Entrx agreed to lend us up to $2.5 million in three separateadvances.  We received the first advanceof $1 million on November 4, 2002.  Thesecond advance was to be made on December 15, 2002 and third advance was to bemade on February 15, 2003, upon the achievement of certain prescribed businessmilestones by us.  This agreement wasamended on February 19, 2003, and the obligation of Entrx to pay the thirdinstallment was waived.  Werepaid this loan by transferring 413,712 shares of NextNet Series A PreferredStock we own to Entrx on March 31, 2003.

 

We alsoreceived $750,000 on February 17, 2003, when we sold shares of NextNet Series APreferred Stock we own to two private investors.

 

We believethat our existing cash and cash equivalents, together with cash provided fromoperations, our borrowings from the Accounts Receivable Purchase Agreement withSilicon Valley Bank, the receipt of $750,000 in February 2003 from the sale ofNextNet Series A Preferred Stock and $750,000 in the first quarter of 2003 inconnection with our loan from Entrx, and commitments from two private investorsto pay $700,000 for our remaining NextNet shares, if necessary, should besufficient to meet our working capital and capital expenditure requirementsthrough at least December 31, 2003.

 

14

----

 

We willcontinue to explore possibilities for additional financing, which may includedebt, equity, or other strategic alternatives that may be available to us,including a potential sale of all or a portion of our stock, assets, orremaining investment in NextNet.  Wecannot be certain that additional financing will be available to us onfavorable terms, if at all. If our financial performance adversely affects ourability to obtain funds secured by our accounts receivable, and we are unableto obtain additional financing, we may not be able to meet our cashrequirements beyond December 31, 2003.

 

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

 

We are not currentlyexposed to market risk from changes in security prices and interest rates. Wedo not invest in any derivative financial instruments. Excess cash is investedin short-term low-risk vehicles, such as money market investments. Changes ininterest rates are not expected to have a material adverse effect on ourbusiness, financial condition or results of operations.

 

**Item 4.  Disclosure Controls and Procedures**

 

In order to ensure that the information we must disclose in our filingswith the Securities and Exchange Commission is recorded, processed, summarizedand reported on a timely basis, we have formalized our disclosure controls andprocedures. Our principal executive officer and principal financial officerhave reviewed and evaluated our disclosure controls and procedures as definedin Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Actof 1934, as amended (the “Exchange Act”) as of a date within 90 daysprior to the filing date of this report (the “Evaluation Date”). Based on suchevaluation, such officers have concluded that, as of the Evaluation Date, ourdisclosure controls and procedures are effective in bringing to their attentionon a timely basis material information relating to Zamba required to beincluded in our periodic filings under the Exchange Act.

 

Since the Evaluation Date, there have not been any significant changesin our internal controls, or in other factors that could significantly affectthese controls subsequent to the Evaluation Date.

 

**Cautionary Statement for Purposes of the‘Safe Harbor’ Provisions of the Private Securities Litigation Reform Act of1995**

 

Certain statements in this Quarterly Reporton Form 10-Q are “forward-looking statements” within the meaning of the PrivateSecurities Litigation Reform Act of 1995. When usedin 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 generally intended toidentify forward-looking statements. Because these forward-looking statementsinvolve risks and uncertainties, actual results could differ materially fromthose 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 the growth rate ofthe marketplace for customer-centric solutions, our ability to develop skillsin implementing customer-centric solutions, the ability of our partners tomaintain competitive products, the impact of competition and pricing pressuresfrom actual and potential competitors with greater financial resources than wehave, our ability to obtain large-scale consulting services agreements, clientdecision-making processes, changes in expectations regarding the informationtechnology industry, our ability to fund operations, our ability to hire andretain competent employees, our ability to make acquisitions under advantageousterms and conditions, our success in integrating acquisitions into our businessand our culture, and possible costs incurred related to the integration, ourability to grow revenues from acquired companies, possible changes incollections of accounts receivable, changes in general economic conditions andinterest rates, changes in information technology spending within companies,changes in the global geopolitical situation, sales of our NextNet shares, andother factors identified in our filings with the Securities and ExchangeCommission, including those identified in Exhibit 99.01 to this QuarterlyReport on Form 10-Q. We disclaim any intention or

 

15

----

 

obligation to update or reviseany forward-looking statements, whether as a result of new information, futureevents or otherwise.

 

**PARTII. OTHER INFORMATION**

 

Item 1.             Legal Proceedings

 

We are subject to variouslegal proceedings and claims that arise in the ordinary course ofbusiness.  The following is a summary ofour current legal proceedings.

 

On August 5,2002, our former president and CEO, Doug Holden, notified us that he believeswe breached his severance agreement with us following the separation of hisemployment.  Mr. Holden has requestedcontinued payroll and benefits and continued vesting of stock options for sixmonths from June 27, 2002, the date of his separation.  Mr. Holden’s annualized salary at the timeof his separation was $240,000. Therefore, the value of Mr. Holden’s claims isapproximately $120,000, plus the value of his benefits and continued vesting ofhis options.  We believe that we havevalid defenses to Mr. Holden’s claims and/or that Mr. Holden is not entitled tothe items he is requesting.  The timingand ultimate resolution of Mr. Holden’s claims are uncertain at this time.

 

We have settledsome of the actual or threatened legal proceedings that were described in ourAnnual Report on Form 10-K for the year ended December 31, 2002.  These matters include the following:

 

On March 13, 2003, wereached an agreement with Key Equipment Finance, to terminate our lease foroffice furniture and settle related litigation.  Under the agreement, we will pay a total of $145,000 in variousinstallment payments from the settlement date through December 2003. Key hadpreviously filed a complaint against us in Hennepin County District Court inMinneapolis, Minnesota alleging that we had breached leases for officefurniture.  This lawsuit was dismissedwith prejudice in connection with the settlement.

 

We are alsosubject to other various legal proceedings and claims that we do not believeare material either separately or in the aggregate.

 

Item 2.             Changes in Securities and Use of Proceeds

 

None.

 

Item 3.             Defaults Upon Senior Securities

 

None.

 

Item 4.             Submission of Matters to a Vote ofSecurity Holders

 

None.

 

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:

 

16

----

 

On February26, 2003, we filed a report on Form 8-K in conjunction with Entrx Corporationto announce that Zamba had completed the financing arrangement with Entrxpreviously announced on November 5, 2002.

 

On April 25,2003, we filed a report on Form 8-K to announce earnings for the first quarterended March 31, 2003.

 

17

----

 

SIGNATURES

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, the Registrant has duly caused this reportto be signed on its behalf by the undersigned thereunto duly authorized.

 
|   | ZAMBA  CORPORATION   |
|--------|----------------------|
|   |                 |
|   | By:                  | /s/ Norm  Smith |   |
|   |                 | Norman D. Smith |
|   |                 | 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  14, 2003 |

 

18

----

 

I, Norman D. Smith, certifythat:

 

1.                    I havereviewed this Quarterly Report on Form 10-Q of Zamba Corporation;

 

2.                    Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.                    Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.                    Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a) Designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

b) Evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c) Presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.                    Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a) Allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b) Any fraud,whether or not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.                    Theregistrant’s other certifying officers and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date:  | May 14, 2003       |
|--------|-------------------------|
|   |                    |
|   | /s/ Norman D. Smith     |   |
|   |                    |
|   | Chief Executive Officer |

 

19

----

 

I, Michael H.Carrel, certify that:

 

1.                    I havereviewed this Quarterly Report on Form 10-Q of Zamba Corporation;

 

2.                    Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.                    Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.                    Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a) Designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

b) Evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c) Presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.                    Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a) Allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b) Any fraud,whether or not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.                    Theregistrant’s other certifying officers and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date:  | May 14, 2003       |
|--------|-------------------------|
|   |                    |
|   | /s/ Michael H. Carrel   |   |
|   |                    |
|   | Chief Financial Officer |

 

20

----

 

EXHIBIT INDEX

 
| **EXHIBIT  NUMBER** |   | **TITLE**                                                                                                                        |
|---------------------|--------|----------------------------------------------------------------------------------------------------------------------------------|
| 99.01               |   | Cautionary Statement Regarding  Forward-Looking Statements                                                                       |
|                |   |                                                                                                                             |
| 99.02               |   | Certification of Chief Executive  Officer and Chief Financial Officer Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 |

 

21

----