.

**SECURITIESAND 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 September 30, 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              ** |
|-------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

** **

**CommissionFile Number 0-22718**

 

**ZAMBACORPORATION**

(Exactname of Registrant as specified in its charter)

 

| **Delaware**                     |   | **#41-1636021**      |
|----------------------------------|--------|----------------------|
| (State  or other jurisdiction of |   | (I.R.S.  Employer    |
| incorporation  or organization)  |   | Identification  No.) |
|                             |   |                 |

### **3033Excelsior Boulevard, Suite 200, Minneapolis, Minnesota 55416**

(Addressof principal executive offices, including zip code)

 

**(952) 832-9800**

(Registrant’stelephone 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 suchshorter 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 whether the Registrantis an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

YES            o                         NO          ý

 

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

 

|                           |   | **Outstanding at**    |
|--------------------------------|--------|-----------------------|
| **Class**                      |   | **November 11, 2002** |
| Common  Stock, $0.01 par value |   | 38,794,014            |

 

 

ZAMBA CORPORATION

 

INDEX

 

PART I — FinancialInformation

 
| Item 1.                           | Financial Statements  (Unaudited)                                     |                                                     |   |
|-----------------------------------|-----------------------------------------------------------------------|----------------------------------------------------------|--------|
|                              |                                                                  |                                                     |   |
|                              |                                                                  | Consolidated  Statements of Operations for the           |   |
|                              |                                                                  | Three and Nine  Months Ended September 30, 2002 and 2001 |   |
|                              |                                                                  |                                                     |   |
|                              |                                                                  | Consolidated Balance  Sheets as of                       |   |
|                              |                                                                  | September 30, 2002 and  December 31, 2001                |   |
|                              |                                                                  |                                                     |   |
|                              |                                                                  | Consolidated  Statements of Cash Flows for the           |   |
|                              |                                                                  | Nine Months  Ended September 30, 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           |                                                     |
|                              |                                                                  |                                                     |
| Item 4.                           | 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                        |                                                                  |
|                                   |                                                                       |                                                          |        |  |

 

 

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**Part I.Financial Information**

**Item1:Financial Statements**

** **

**ZAMBACORPORATION**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

** **

(Inthousands, except per share data)

 
|                                                    |   | **For the  three months ended  September 30,** |   | **For the  nine months ended  September 30,** |   |
|---------------------------------------------------------|--------|------------------------------------------------|--------|-----------------------------------------------|--------|
|                                                    |   | **2002**                                       |   | **2001**                                      |   | **2002** |   | **2001** |   |
| Revenues:                                               |   |                                           |   |                                          |   |   |   |   |   |
| Professional services                                   |   | $                                              | 2,449  |                                          | $      | 7,669 |   | $ | 7,679 |   | $ | 27,499 |   |
| Reimbursable expenses                                   |   | 168                                            |   | 534                                           |   | 686 |   | 3,076 |   |
| Total revenue                                           |   | $                                              | 2,617  |                                          | $      | 8,203 |   | $ | 8,365 |   | $ | 30,575 |   |
|                                                    |   |                                           |   |                                          |   |   |   |   |   |
| Costs and expenses:                                     |   |                                           |   |                                          |   |   |   |   |   |
| Project and personnel costs                             |   | 1,859                                          |   | 4,345                                         |   | 7,776 |   | 16,176 |   |
| Reimbursable expenses                                   |   | 168                                            |   | 534                                           |   | 686 |   | 3,076 |   |
| Sales and marketing                                     |   | 246                                            |   | 1,321                                         |   | 1,582 |   | 4,533 |   |
| General and administrative                              |   | 1,599                                          |   | 2,896                                         |   | 6,175 |   | 11,799 |   |
| Restructuring and unusual charges                       |   | 3⁄4                                         |   | 3⁄4                                        |   | 3,321 |   | 2,188 |   |
| Amortization of intangibles                             |   | 3⁄4                                         |   | 31                                            |   | 3⁄4 |   | 106 |   |
| Total costs and expenses                                |   | 3,872                                          |   | 9,127                                         |   | 19,540 |   | 37,878 |   |
|                                                    |   |                                           |   |                                          |   |   |   |   |   |
| Loss from operations                                    |   | (1,255                                         | )      | (924                                          | )      | (11,175 | ) | (7,303 | ) |
|                                                    |   |                                           |   |                                          |   |   |   |   |   |
| Other income (expense):                                 |   |                                           |   |                                          |   |   |   |   |   |
| Gain on sale of NextNet shares                          |   | 310                                            |   | 3⁄4                                        |   | 2,965 |   | 3⁄4 |   |
| Interest income                                         |   | 1                                              |   | 36                                            |   | 12 |   | 126 |   |
| Interest expense                                        |   | (94                                            | )      | (49                                           | )      | (219 | ) | (128 | ) |
| Other income (expense), net                             |   | 217                                            |   | (13                                           | )      | 2,758 |   | (2 | ) |
|                                                    |   |                                           |   |                                          |   |   |   |   |   |
| Net loss                                                |   | $                                              | (1,038 | )                                             | $      | (937 | ) | $ | (8,417 | ) | $ | (7,305 | ) |
|                                                    |   |                                           |   |                                          |   |   |   |   |   |
| Net loss per share - basic and diluted                  |   | $                                              | (0.03  | )                                             | $      | (0.03 | ) | $ | (0.22 | ) | $ | (0.22 | ) |
|                                                    |   |                                           |   |                                          |   |   |   |   |   |
| Weighted average shares outstanding - basic and diluted |   | 38,762                                         |   | 34,727                                        |   | 38,281 |   | 33,100 |   |

 

The accompanying notes are an integral partof the consolidated financial statements.

 

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**ZAMBA CORPORATIONCONSOLIDATED BALANCE SHEETS(Unaudited)**

 

 

(In thousands, except share and per sharedata)

 
|                                                                                                                                                                   |   | **September  30,  2002** |   | **December  31,  2001** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|--------|-------------------------|--------|
| ASSETS                                                                                                                                                                 |   |
| Current assets:                                                                                                                                                        |   |                     |   |                    |   |
| Cash and cash equivalents                                                                                                                                              |   | $                        | 326    |                    | $      | 1,326 |   |
| Accounts receivable, net                                                                                                                                               |   | 1,674                    |   | 1,556                   |   |
| Unbilled receivables                                                                                                                                                   |   | 129                      |   | 608                     |   |
| Notes receivable                                                                                                                                                       |   | 3⁄4                   |   | 560                     |   |
| Notes receivable - related parties                                                                                                                                     |   | 3⁄4                   |   | 310                     |   |
| Prepaid expenses and other current assets                                                                                                                              |   | 504                      |   | 737                     |   |
| Total current assets                                                                                                                                                   |   | 2,633                    |   | 5,097                   |   |
|                                                                                                                                                                   |   |                     |   |                    |   |
| Property and equipment, net                                                                                                                                            |   | 629                      |   | 1,799                   |   |
| Restricted cash                                                                                                                                                        |   | 3⁄4                   |   | 471                     |   |
| Other assets                                                                                                                                                           |   | 108                      |   | 301                     |   |
| Total assets                                                                                                                                                           |   | $                        | 3,370  |                    | $      | 7,668 |   |
|                                                                                                                                                                   |   |                     |   |                    |   |
| LIABILITIES  AND STOCKHOLDERS' EQUITY(DEFICIT)                                                                                                                         |   |
| Liabilities:                                                                                                                                                           |   |                     |   |                    |   |
| Line of credit                                                                                                                                                         |   | $                        | 637    |                    | $      | 1,100 |   |
| Current installments of long-term debt                                                                                                                                 |   | 212                      |   | 392                     |   |
| Accounts payable                                                                                                                                                       |   | 704                      |   | 1,059                   |   |
| Accrued expenses                                                                                                                                                       |   | 3,122                    |   | 2,490                   |   |
| Deferred revenue                                                                                                                                                       |   | 215                      |   | 101                     |   |
| Deferred gain on sale of investment                                                                                                                                    |   | 2,080                    |   | 3⁄4                  |   |
| Total current liabilities                                                                                                                                              |   | 6,970                    |   | 5,142                   |   |
|                                                                                                                                                                   |   |                     |   |                    |   |
| Long-term debt, less current installments                                                                                                                              |   | 227                      |   | 194                     |   |
| Other long-term liabilities                                                                                                                                            |   | 312                      |   | 244                     |   |
|                                                                                                                                                                   |   |                     |   |                    |   |
| Commitments and contingencies                                                                                                                                          |   |                     |   |                    |   |
| Total liabilities                                                                                                                                                      |   | 7,509                    |   | 5,580                   |   |
| Stockholders' equity (deficit):                                                                                                                                        |   |                     |   |                    |   |
| Common stock, $0.01 par value, 120,000 shares authorized, 38,794 and  35,007 shares, issued and outstanding at September 30, 2002 and December 31,  2001, respectively |   | 388                      |   | 350                     |   |
| Additional paid-in capital                                                                                                                                             |   | 86,055                   |   | 84,403                  |   |
| Note receivable from director                                                                                                                                          |   | 3⁄4                   |   | (500                    | )      |
| Accumulated deficit                                                                                                                                                    |   | (90,582                  | )      | (82,165                 | )      |
|                                                                                                                                                                   |   |                     |   |                    |   |
| Total stockholders' equity (deficit)                                                                                                                                   |   | (4,139                   | )      | 2,088                   |   |
|                                                                                                                                                                   |   |                     |   |                    |   |
| Total liabilities and stockholders' equity (deficit)                                                                                                                   |   | $                        | 3,370  |                    | $      | 7,668 |   |
|                                                                                                                                                                   |   |                     |   |                    |   |
| The accompanying notes are an integral part of the consolidated  financial statements.                                                                                 |

 

 

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**ZAMBACORPORATION**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS****(Unaudited)**

** **

(In thousands)
|                                                                                   |   | **Nine  Months Ended  September 30,** |   |
|----------------------------------------------------------------------------------------|--------|---------------------------------------|--------|
|                                                                                   |   | **2002**                              |   | **2001** |   |
|                                                                                   |   |                                  |   |   |   |
| Cash flows from operating activities:                                                  |   |                                  |   |   |   |
| Net loss                                                                               |   | $                                     | (8,417 | ) | $ | (7,305 | ) |
| Adjustments to reconcile net loss to net cash  used in operating activities:           |   |                                  |   |   |   |
| Depreciation and amortization                                                          |   | 347                                   |   | 654 |   |
| Non-cash compensation - forgiveness of director loan                                   |   | 443                                   |   | 3⁄4 |   |
| Provision for bad debts                                                                |   | 20                                    |   | 691 |   |
| Gain on disposal of fixed assets                                                       |   | (2                                    | )      | 3⁄4 |   |
| Gain on sale of NextNet shares                                                         |   | (2,965                                | )      | 3⁄4 |   |
| Changes in operating assets and liabilities:                                           |   |                                  |   |   |   |
| Accounts receivable                                                                    |   | (113                                  | )      | 2,191 |   |
| Unbilled receivables                                                                   |   | 479                                   |   | 292 |   |
| Notes receivable                                                                       |   | 535                                   |   | 156 |   |
| Prepaid expenses and other assets                                                      |   | 426                                   |   | (212 | ) |
| Accounts payable                                                                       |   | (355                                  | )      | (737 | ) |
| Accrued expenses and other long-term liabilities                                       |   | 1,592                                 |   | 166 |   |
| Deferred revenue                                                                       |   | 114                                   |   | (1,027 | ) |
| Net cash used in operating activities                                                  |   | (7,896                                | )      | (5,131 | ) |
|                                                                                   |   |                                  |   |   |   |
| Cash flows from investing activities:                                                  |   |                                  |   |   |   |
| Purchase of property and equipment                                                     |   | (49                                   | )      | (670 | ) |
| Proceeds from sale of NextNet shares                                                   |   | 5,045                                 |   | 3⁄4 |   |
| Proceeds from sale of equipment                                                        |   | 4                                     |   | 3⁄4 |   |
| Restricted cash                                                                        |   | 471                                   |   | (207 | ) |
| Notes receivable - related parties                                                     |   | 310                                   |   | 45 |   |
| Net cash provided by (used in) investing activities                                    |   | 5,781                                 |   | (832 | ) |
|                                                                                   |   |                                  |   |   |   |
| Cash flows from financing activities:                                                  |   |                                  |   |   |   |
| Line of credit, net                                                                    |   | (463                                  | )      | 2,800 |   |
| Proceeds from sale of common stock                                                     |   | 1,712                                 |   | 2,240 |   |
| Proceeds from exercises of stock options                                               |   | 13                                    |   | 37 |   |
| Payments of long-term debt                                                             |   | (147                                  | )      | (421 | ) |
| Net cash provided by financing activities                                              |   | 1,115                                 |   | 4,656 |   |
|                                                                                   |   |                                  |   |   |   |
| Net decrease in cash and cash equivalents                                              |   | (1,000                                | )      | (1,307 | ) |
| Cash and cash equivalents, beginning of period                                         |   | 1,326                                 |   | 4,843 |   |
| Cash and cash equivalents, end of period                                               |   | $                                     | 326    |   | $ | 3,536 |   |
|                                                                                   |   |                                  |   |   |   |
| Supplemental Schedule for Disclosures of Cash Flow Information:                        |   |                                  |   |   |   |
|                                                                                   |   |                                  |   |   |   |
| Cash paid during the period for interest                                               |   | $                                     | 161    |   | $ | 110 |   |
|                                                                                   |   |                                  |   |   |   |
| The accompanying notes are an integral part of the consolidated  financial statements. |

 

 

 

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ZAMBA CORPORATION

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

NoteA.  Basis of Presentation:

 

The unauditedconsolidated financial statements of ZAMBA Corporation as of September 30,2002, and for the three and nine month periods ended September 30, 2002 and2001, reflect all adjustments (which include only normal recurring adjustments,except as disclosed in the footnotes) necessary, in the opinion of management,to fairly state our financial position as of September 30, 2002, and ourresults of operations and cash flows for the reported periods.  The results of operations for any interimperiod are not necessarily indicative of the results to be expected for anyother interim period or for the full fiscal year.  The year-end balance sheet data was derived from auditedfinancial statements, but does not include all disclosures required bygenerally accepted accounting principles. Certain prior year amounts have been reclassified to conform with the2002 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:

 

Weincurred significant losses and negative cash flows from operations during thethree and nine months ended September 30, 2002, and continued to incur operatinglosses in the first month of the fourth quarter of fiscal 2002.  As of September 30, 2002, we had negativeworking capital of $4.34 million and a stockholder’s deficit of $4.14 million.  To fund our operations, we raisedapproximately $7.93 million in financing between January 1, 2002 and November4, 2002. This amount includes approximately $5.25 million in exchange forselling some of our NextNet Wireless, Inc. (“NextNet”) stock, loan proceeds inthe amount of $1.00 million, and an additional $1.68 million in exchange forselling some of our own common stock. Transactions between July 1, 2002 and November 4, 2002 were as follows:

 

In July 2002, we received$850,000 in advances from Joseph B. Costello, our chairman. We had alsoreceived an advance in the amount of $450,000 from Mr. Costello in June2002.  On August 6, 2002, these advanceswere converted to shares of Zamba’s NextNet Series A Preferred Stock at a priceof $6.00 per share.** **See Note H for additional discussion.

 

Between July 1, 2002 andSeptember 30, 2002, we entered into stock purchase agreements to sell 30,002shares of our Series A Preferred Stock in NextNet, at a price of $6.00 pershare, to four accredited investors in private transactions for an aggregateconsideration of approximately $180,000. Pursuant to these agreements, we received $150,000 in August and $30,000in September.  See Note H for additionaldiscussion.

 

On November 5, 2002, weannounced the closing of a loan agreement with Entrx Corporation (“Entrx”),under which Entrx agreed to lend us up to $2.5 million in three separateadvances.  We received the first advanceof $1.00 million on November 4, 2002. The second and third advances will be made only upon the achievement ofcertain prescribed business milestones. See Note J for additional discussion.

 

Wepartly fund our operations through our banking relationship with Silicon ValleyBank.  Prior to July 29, 2002, wemaintained a line of credit with Silicon Valley Bank. On July 29,2002, we entered into an Accounts Receivable Purchase Agreement with SiliconValley Bank to replace the line of credit. Although there are no financialcovenants in the new agreement with Silicon Valley Bank, they may still declaredefault in certain circumstances.  SeeNote G for additional discussion.

 

Ourability to continue as a going concern depends upon our ability to continue toaccess our borrowing facility with our bank, obtain the second and thirdadvances under the loan from Entrx, obtain any additional funding that may beneeded, and achieve and sustain profitability. Additionally, if we receive a materially adverse judgment in any of thematters described in Note I, our financial position could be materiallyadversely affected and we may not be able to continue as a going concern.  The accompanying financial statements have 

 

 

6

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been prepared on agoing concern basis, which assumes continuity of operations and realization ofassets and liabilities in the ordinary course of business.  These financial statements do not includeany adjustments that might result if we were forced to discontinue ouroperations.

 

Note C. SelectedBalance Sheet Information:

 
| (in thousands)                                  |   | **September  30, 2002** |   | **December  31, 2001** |   |
|-------------------------------------------------|--------|-------------------------|--------|------------------------|--------|
|                                            |   |                    |   |                   |   |
| Accounts receivable, net:                       |   |                    |   |                   |   |
| Accounts receivable                             |   | $                       | 1,818  |                   | $      | 1,739 |   |
| Less allowance for doubtful accounts            |   | (144                    | )      | (183                   | )      |
| Totals                                          |   | $                       | 1,674  |                   | $      | 1,556 |   |
| Property and equipment, net:                    |   |                    |   |                   |   |
| Computer equipment                              |   | $                       | 1,668  |                   | $      | 1,695 |   |
| Furniture and equipment                         |   | 370                     |   | 614                    |   |
| Leasehold improvements                          |   | 166                     |   | 1,189                  |   |
| Totals                                          |   | 2,204                   |   | 3,498                  |   |
| Less accumulated depreciation and  amortization |   | (1,575                  | )      | (1,699                 | )      |
| Totals                                          |   | $                       | 629    |                   | $      | 1,799 |   |

 

 

Note D.  Net Loss Per Share:

 

We incurred net losses forthe three and nine-month periods ended September 30, 2002 and 2001. Thecalculation of diluted net loss per common share does not include approximately0 and 109,000 potential shares of common stock equivalents for the three andnine month periods ended September 30, 2002 and 2001, respectively, as theirinclusion would be anti-dilutive.

 

Note E.  RecentAccounting Standards:

 

In June 2002, theFinancial Accounting Standards Board (“FASB”) issued Statement No. 146 (“FAS146”), *Accounting for Costs Associated withExit or Disposal Activities*, which addresses financial accountingand reporting for costs associated with exit or disposal activities.  Under FAS 146, such costs will generally berecognized when the liability is incurred, rather than at the date ofcommitment to an exit plan.  FAS 146 iseffective for exit or disposal activities that are initiated after December 31,2002, with early application permitted. 

 

In November 2001, theFASB issued a Staff Announcement, entitled Topic No. D-103, regarding theincome statement classification of reimbursements received for “out-of-pocket”expenses incurred. This Staff Announcement requires that out-of-pocket expensesincurred and the related reimbursements for these expenses be reflected in theincome statement on a gross basis as both revenue and expense.  Previously, we had classified theseout-of-pocket expense reimbursements as a reduction of project and personnelcosts.  This Staff Announcement iseffective for financial reporting periods beginning after December 15, 2001,and accordingly, we implemented this Staff Announcement on January 1,2002.  We have adjusted revenue for allperiods reported to include out-of-pocket expense reimbursements.  This change in classification had no effecton current or previously reported net loss or loss per share.

 

In August 2001, FASBissued Statement of Financial Accounting Standards No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets” (“SFAS No. 144”), which addressesfinancial accounting and reporting for the impairment or disposal of long-livedassets.  While SFAS No. 144 supersedesboth SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and forLong-Lived Assets to Be Disposed Of,” and APB Opinion No. 30, “Reporting theResults of Operations—Reporting the Effects of Disposal of a Segment of aBusiness, and Extraordinary, Unusual and Infrequently Occurring Events andTransactions”, it retains the

fundamental provisions of those Statements.  SFAS No. 144 is effective for fiscal yearsbeginning after

 

7

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December 15, 2001, and accordingly, we implemented iton January 1, 2002.  The implementationof SFAS No. 144 did not have an impact on our financial position, results ofoperations or cash flows for the three or nine months ended September 30, 2002.

 

In July 2001, the 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 pastbusiness combinations, would have therefore ceased upon adoption of SFAS No.142, which for us was January 1, 2002. The implementation of SFAS No. 141 and SFAS No. 142 did not have animpact on our financial position, results of operations or cash flows for thethree or nine months ended September 30, 2002, as we had no goodwill remainingto be amortized from past business combinations.

 

Note F.   Restructuring and Unusual Charges:

 

In the second quarter of2002, we incurred unusual charges of $1.64 million for facility and non-cashcompensation matters. Included in this amount was a $1.19 million charge forfacility closings and lease termination costs. The facility charges included $190,000 for closing the Boston,Massachusetts, facility, $290,000 for reducing the amount of space leased inMinneapolis, Minnesota, and $713,000 for increasing the accrual for our St.Paul, Minnesota and Campbell, California facilities to amounts consistent withbuy-out offers made by our landlords. We expect that these charges will result in annual savings of $1.8million.  We also incurred a $443,000non-cash compensation charge arising out of the exercise by Paul Edelhertz, amember of our board of directors, of his right to assign to us an aggregate of250,000 shares of our common stock in exchange for our cancellation of apromissory note issued to us by Mr. Edelhertz bearing a principal balance of$500,000 and accrued interest through the date of cancellation of $43,250.  This transaction relates to an agreementdated December 26, 2000, as amended on August 2, 2001.  We have paid $920,000 of these charges as ofSeptember 30, 2002, and expect to pay the remaining charges throughout the nextfive quarters.

 

In the first quarter of2002, we incurred unusual charges of $1.69 million for facility and employmentmatters. Included in this amount was a  $1.34 million charge related to ourCampbell, California, facility and our Colorado Springs, Coloradofacility.  We expect that thesetransactions will result in annual cost savings of $1.0 million.  In addition, a $350,000 charge was taken forseverance pay relating to reduced headcount, including the separation of threevice presidents, in the first quarter of 2002. We expect the headcount reductions to result in annual savings of $3.5million. We have paid $905,000 of these unusual charges as of September 30,2002, and expect to pay $220,000 in the fourth quarter of 2002, $200,000 in thefirst quarter of 2003, $200,000 in the second quarter of 2003 and $165,000 inthe third quarter of 2003.

 

We undertook arestructuring action in the second quarter of 2001, when we recorded arestructuring charge of $2.19 million. We made other headcount reductions in the third and fourth quarters of2001, and took further cost-reduction measures in the first and second quartersof 2002, as described above.  Ourrestructuring charge in the second quarter of 2001 was composed of $777,000 forseverance payments, $123,000 for other employee-related costs (includingcontinued medical benefits for the terminated employees), $1.173 million forfacility closings and other lease termination costs, $87,000 to resolve acontract dispute with a vendor, and $28,000 of other related restructuring charges.  No non-cash write-offs were incurred inconnection with the restructuring charge. The facilities portion of the restructuring charge in the second quarterof 2001 includes new and additional lease termination costs and other expensesassociated with our decisions to consolidate our operations and closeunproductive or duplicative office locations in St. Paul, Minnesota andPleasanton and Carlsbad, California.  Ofthe approximately $1.2 million in facilities-related restructuring chargesincurred in the second quarter of 2001, we paid $1.1 million through September30, 2002, and expect to pay the balance of approximately $107,000 in the fourthquarter of fiscal 2002.

 

 

8

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                A summary of restructuring and unusual chargeactivity through September 30, 2002 is as follows:

 
|                                                                 |   | **Facility  Closings  and Lease  Termination Costs** |      | **Severance  and  Other Employee  Related Costs** |   | **Other** |   | **Total**  |    |
|----------------------------------------------------------------------|--------|------------------------------------------------------|-----------|---------------------------------------------------|--------|-----------|--------|------------|---------|
|                                                                 |   |                                                 |      |                                              |   |      |   |       |    |
| Second Quarter 2001 Provision                                        |   | $                                                    | 1,173,000 |                                              | $      | 900,000   |   | $          | 115,000 |   | $ | 2,188,000 |   |
| 2001 Utilized                                                        |   | (546,000                                             | )         | (900,00                                           | )      | (115,000  | )      | (1,561,000 | )       |
| Balance as of December 31, 2001                                      |   | 627,000                                              |      | 3⁄4                                            |   | 3⁄4    |   | 627,000    |    |
| First Quarter 2002 Provision                                         |   | 1,335,000                                            |      | 350,000                                           |   | 3⁄4    |   | 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    |    |
| Additional facility related accruals in  the fourth quarter of 2001  |   | 175,000                                              |      |                                              |   |      |   | 175,000    |    |
| YTD 2002 Utilized                                                    |   | (1,711,000                                           | )         | (315,000                                          | )      | (443,000  | )      | (2,469,000 | )       |
| Balance as of September 30, 2002                                     |   | $                                                    | 1,619,000 |                                              | $      | 135,000   |   | $          | 3⁄4  |   | $ | 1,754,000 |   |

 

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. Our alleged default under a lease for furniture as setforth more fully in Note I is technically an "Event of Default" underthe Accounts Receivable Purchase Agreement. Upon default, Silicon Valley Bank may elect from remedies includingdeclaring all amounts paid to us under the agreement due and payable in full,or ceasing to buy receivables from us. Silicon Valley Bank has not elected to enforce this provision.  If Silicon Valley Bank decides to enforcethis provision, or otherwise does not purchase receivables from us, our abilityto fund our operations could be materially harmed.  This facility expires on July 29, 2003.  The amount outstanding under this agreement was $637,000 atSeptember 30, 2002.

 

The AccountsReceivable Purchase Agreement replaces 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 worth andprofitability covenants. This facility was to expire on December 31, 2002, butwas replaced by the Accounts Receivable Purchase Agreement.  Amounts outstanding under the revolvingcredit facility were converted to being outstanding under the Accounts ReceivablePurchase Agreement.  

 

Note H.   Sales of Investments:

 

                Inthe second and third quarters of 2002, we entered into several transactionswith private investors in which we sold portions of our equity holdings inNextNet Wireless, Inc. (“NextNet”). NextNet is 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 of our directors, DixonDoll, is also a director and a shareholder of NextNet.  Additionally, another director of

 

 

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Zamba, Sven Wehrwein, is a consultant forNextNet.  There are no otherrelationships or business transactions between the two companies since at theearliest January 1, 2000. 

 

Wesold a portion of our shares of Series A Preferred Stock in NextNet for $3.00per share, and a portion of our shares of Series A Preferred Stock in NextNetfor $6.00 per share.  We determined thesales price for our NextNet shares from various sources, including: a)discussions with potential investors, wireless telecommunications industryexperts, investment bankers, and venture capitalists, b) looking at a proposedsale of NextNet stock with similar rights as ours that NextNet itself hadconsidered immediately prior to our first sale to an outside investor, c)analyzing and comparing publicly held securities in related industries, d)considering our immediate cash needs, and e) the stage of development thatNextNet was at as a company, at the time of the transactions. Another majorfactor in establishing the sales price was our determination of what anarms-length purchaser would pay for our shares.  We had approached potential buyers of our NextNet shares sinceJune 2001, but we were unable to find any interest, for many reasons includingthe facts that NextNet had not yet obtained any significant orders and investorswere not interested in the telecommunications sector in general.  On April 8, 2002, NextNet announced itsfirst significant client, MVS Comunicaciones. Based on this announcement, some potential buyers became more interestedin purchasing NextNet stock from us.

 

Based on our analysis, wedetermined that we would offer our NextNet shares at $6.00 per share.  However, as we discussed in our AnnualReport on Form 10-K, which we filed on April 1, 2002, we had only enough cash tomeet our financial requirements through April 30, 2002.  We therefore had an immediate desire toobtain approximately $600,000 by mid-to-late April for payroll and otherimmediate cash needs.  The largerpotential investors included Imagine Capital Partners, The Rahn Group, Blake Capitaland Wyncrest Capital, which eventually participated in both the first andsecond series of transactions. This group told us that they would not pay morethan $3.00 per share if we wanted to raise money in such a short time frame.  Other than several smaller participants inour first round, none of the other potential purchasers we had contactedindicated any interest in buying any of our NextNet shares at any price.  Therefore, for our initial series of sales ofNextNet stock, we agreed to sell 200,000 shares at $3.00 per share.  Because Mr. Costello’s agreements to buysome of our NextNet shares, which were signed in February and March 2002,before any third party was willing to buy any of our NextNet stock, at anyprice, called for his shares to be valued at the per share price establishedupon our sale of any shares of our NextNet stock to any third party, the shareshe purchased were then also valued at $3.00 per share.  In the next two series of investments, wewere able to offer more desirable and flexible payment terms, and therefore, wewere able to sell 281,664 shares at $6.00 per share from late April to earlyJune.  

 

The first series oftransactions occurred between April 10 and April 16, 2002, when we entered intostock purchase agreements with six private investors, in which the investorspurchased an aggregate of 200,000 shares of our Series A Preferred Stock inNextNet.  The investors paid us anaggregate 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 second datedMarch 25, 2002, were valued at $3.00 per share. As of March 31, 2002, Mr.Costello had paid us $700,000 pursuant to these two purchase agreements, whichmeans that as a result of the $3.00 per share valuation, Mr. Costello received233,333 of our NextNet shares.  

 

The second series oftransactions occurred between April 10 and April 30, 2002. During this secondseries, we entered into stock purchase agreements with seven private investors,in which we sold an aggregate of 229,997 shares of our Series A Preferred Stockin NextNet for an aggregate consideration of $1,380,000.  Of this amount, $880,000 was received inApril and $500,000 was received in May. All of the shares were sold at a per share price of $6.00.  In connection with the second series of salesof NextNet shares in April 2002, we entered into stock purchase agreements withtwo private investors, pursuant to which we agreed to sell an aggregate of133,332 shares of our Series A Preferred Stock in NextNet for an aggregateconsideration of $800,000.  Of thisamount, $600,000 was received in September 2002 and $154,000 was received inOctober 2002, and remaining $46,000 is to be received at a later date.  The price for these shares is also $6.00 pershare.  We recorded a deferred gain onsale of investment when we received the cash from these transactions, and again on sale of investment will be recorded when the shares are transferred tothe private investors. 

 

 

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Thethird series of transactions occurred between May 29, 2002 and June 13, 2002.During this third series, we entered into stock purchase agreements with twoprivate investors and three private investment funds managed by Dr. Doll, adirector of our company, in which we sold an aggregate of 51,667 shares of ourSeries A Preferred Stock in NextNet for an aggregate consideration of$310,000.  Of this consideration, theentities managed by Dr. Doll purchased an aggregate of 25,000 of our NextNetshares for an aggregate consideration of $150,000.  We received the cash for these shares in June.  All of the shares were sold at a per shareprice of $6.00.

 

In the third quarter of2002, we entered into stock purchase agreements with four private investors, inwhich we sold an aggregate of 30,002 shares of our Series A Preferred Stock inNextNet for an aggregate consideration of $180,012. We received the cash forthese shares in August and September. All of the shares were sold at a per share price of $6.00.  We recorded a deferred gain on sale ofinvestment when we received the cash from these transactions, and a gain onsale of investment will be recorded when the shares are transferred to theprivate investors. 

 

In addition to the abovetransactions, in order to make payroll and other critical vendor payments,Joseph B. Costello, our chairman, advanced $450,000 to us in June 2002, and$850,000 in July 2002.  In considerationof these advances, our Board of Directors has agreed to transfer a total of216,668 of our shares of NextNet Series A Preferred Stock valued at $6.00 pershare. Mr. Costello may also receive more of our NextNet shares if, at any timeprior to December 31, 2002, the Company sells additional NextNet shares for anaggregate purchase price equal to or in excess of One Hundred Thousand Dollars($100,000) at a per share purchase price that is less than $6.00 pershare.  In such event, we will provideMr. Costello with an amount of additional NextNet shares that causes the pershare purchase price paid by Mr. Costello to be equivalent to the lower pershare price of the subsequent sale.

 

All of the NextNet sharesthat we sell, including those sold to Mr. Costello, are subject to the right offirst refusal on the parts of NextNet and the holders of the Series B PreferredStock of NextNet.

 

During the second quarter of 2002, as a result of the first two seriesof NextNet stock sales, including the sales to Mr. Costello arising out of hispayments in February and March, we reported a gain on sale of investment of$2,655,000, net of a finders fee of $25,000 to Ralph Muse, a former CEO ofNextNet.  During the third quarter of2002, the third series of transactions, including the sales to entities managedby Dr. Doll, we reported a gain on sale of investment of $310,000.  As of September 30, 2002, we have recorded$2,080,012 as a deferred gain on sale of investment. We will report the gain onsale of investment when the shares are transferred to the privateinvestors.  

 

As of September 30, 2002, our remaining ownership is 1,305,000 sharesof Series A Preferred Stock in NextNet, or approximately 20% of the equity inNextNet.  Of our remaining shares, wehave placed 833,333 in an escrow account as collateral for our loan from EntrxCorporation.  We have also reserved anadditional 250,000 of our NextNet shares for an option granted to Entrxpursuant to the loan.  See Note J forfurther discussion regarding the loan from Entrx.

 

Note I. Legal Matters

 

We are subject tovarious legal proceedings and claims that arise in the ordinary course of business.  The following is a summary of our currentlegal proceedings.

 

On October 7, 2002, KeyEquipment Finance International, Inc. filed a complaint against us in HennepinCounty Minnesota District Court alleging that we breached three leases with Keyfor office furniture.  We filed ouranswer to this complaint on October 11, 2002. Monthly rent on these leases was approximately $22,000.  As of May 20, 2002, we had not paid rent forthe months of April and May 2002, and Key declared us to be in default of theseleases.  In early June, Key recovered aletter of credit of approximately $263,000 for these leases.  Upon default, the lease allows Key torecover the amounts of unpaid rent as of the date payment is requested for theunpaid rent, plus interest on the unpaid rent for the period running from thedate payment was requested through the date of payment, plus the “StipulatedLoss Value” for the equipment.  We arealso potentially liable for Key’s attorneys’ fees.  Because no Stipulated Loss Value was attached to the contract, webelieve that Key

 

 

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will only be entitled tothe amount of unpaid rent as of the date payment was requested to be made, plusany interest that accrues on the unpaid rent which is less than the amount ofmoney Key recovered through the letter of credit.  We have no assurance that we will be successful in our positionregarding our liability for the Stipulated Loss Value.  We have returned most of the leasedfurniture to Key, and we believe that Key has already sold some or all of theequipment that we returned.  The amountsKey received from sale of the equipment may reduce the amount, if any, that weowe Key under the leases.  Key hasrequested $375,000 to settle this matter. We have no assurance that a judgment against us will not meet or exceedthe amount requested by Key for settlement or that we will not also be foundliable for Key’s attorneys’ fees.

 

On August 5, 2002, ourformer president and CEO, Doug Holden, notified us that he believes we breachedhis 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 are attempting to resolvethese matters, but we cannot be certain that we will be able to successfullyresolve these matters on favorable terms, and we cannot be certain that we willbe successful in litigation.  If we areunable to resolve these matters, and if we lose the litigation for thesematters, our financial position could be materially harmed.

 

We are also subject to othervarious legal proceedings and claims that we do not believe are material eitherseparately or in the aggregate.

 

Note J.    Loan Agreement with Entrx Corporation

 

OnNovember 5, 2002, we announced the closing of a loan agreement with EntrxCorporation (“Entrx”), under which Entrx will lend us up to $2.50 million inthree separate advances.  The loan bearsinterest at the rate of 8% per annum of the outstanding advances, and we arerequired to make monthly interest payments on any outstanding advances.  We received the first advance of $1.00million on November 4, 2002.  The secondadvance is due on December 15, 2002 and the third advance is due February 15,2003.  

 

Thesecond advance, in the amount of $750,000, is subject to our achieving fourconditions: (i) a loss from operations for the period from October 1, 2002through November 30, 2002 no greater than $515,000; (ii) no “Material AdverseOccurrence” exists or has occurred as of December 15, 2002; (iii) each andevery representation, warranty and covenant by us in the loan agreement remainstrue as of the date of the second advance; and (iv) no event occurs whichconstitutes, or with the passage of time or giving of notice would constitute,an “Event of Default” by us.  Generally,a material adverse occurrence means any event or occurrence that Entrxdetermines has, will or could reasonably be expected to materially adverselyaffect our business or financial condition or NextNet’s business or financialcondition.  An event of default by usunder the loan agreement generally means any of the following:

 

·      any failure byus to make an interest payment on any outstanding advance that is not paidwithin 15 days of written notice from Entrx;

·      any materialmisrepresentation by us in the loan agreement that continues for a period of 30days after written notice from Entrx;

·      the applicationby us or consent to the appointment of a trustee or receiver of our business orproperty;

·      the institutionof any dissolution or liquidation proceeding by or against us; or 

·      the entry ofjudgments against us for the payment of money totaling in excess of $10.00million, which remains outstanding for a period of 90 days without a stay ofexecution.

 

Thethird advance is due on February 15, 2003. The third advance, also in the amount of $750,000, is subject to ourachieving four conditions that are similar to those for the second advance,except that our loss from operations for the period from October 1, 2002through January 31, 2003 is to be no greater than $807,000.

 

 

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Theadvances under the loan agreement are convertible, at the option of Entrx, intoeither shares of our common stock or shares of Series A Preferred Stock ofNextNet we own.  Entrx must provide theentire $2.50 million of the loan agreement in order to elect conversion intoshares of our common stock, provided that this conversion option must beexercised on or before March 31, 2003. If Entrx elects its loan into shares of our common stock, we will issueit that number of shares equal to 20% of all of our issued and outstandingcommon stock, including such shares. Entrx may also elect, at any time on or before March 31, 2003, toconvert all or part of the outstanding advances into shares of Series APreferred Stock we hold in NextNet initially at $6.00 per share.  This conversion price is subject toadjustment.  Further, if we defaultunder the loan agreement, the per share conversion price of the Series APreferred Stock we hold in NextNet will be reduced to $3.00 per share**,** unless there is at the same time adefault under the loan agreement by Entrx. In connection with the loan agreement, we also entered into a Pledge andEscrow Security Agreement with Entrx pursuant to which we placed in escrow astock certificate for an aggregate of 833,333 shares of Series A PreferredStock in NextNet as security for the loan.

 

Inconnection with entering into the loan agreement, we granted Entrx an option topurchase up to an additional 250,000 of our shares of Series A Preferred Stockin NextNet initially at a price of $6.00 per share.  This option will expire on April 15, 2003, unless Entrx by thatdate has purchased at least 50,000 shares upon exercise of the option.  If Entrx timely completes this partialexercise, then Entrx will have until July 15, 2003 to exercise its option forthe remainder of the shares covered by the option.

 

                Entrx was also granted the rightto appoint one representative to be a member of our Board of Directors.

 

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

 

**Overview**

 

Zamba Corporation providescustomer relationship management (“CRM”) consulting and systems integrationservices 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 increasecustomers’ access to the enterprise through the use of multiple channels ofcommunication, including Internet, call-based routing, and sales forceautomation, with the goal being to increase the enterprise’s knowledge of thepreferences and needs of its customers. Based on our CRM expertise and experience, we have created solutionsthat we believe address each aspect of CRM, including strategy, marketing andanalytics, content and commerce, contact center, field sales, field service andenterprise integration.  We also ownstock in NextNet.  See Note H to ourNotes to Consolidated Financial Statements for additional discussion regardingour sales of a certain portion of our NextNet investment.

 

We currently derive mostof our client revenues from systems integration services, including businesscase evaluation, system planning and design, software package implementation,custom software development, training, installation and change management.  Our revenues and earnings  historically have fluctuated fromquarter-to-quarter based on the number, size and scope of projects in which weare engaged, the contractual terms and degree of completion of such projects,any delays incurred in connection with a project, the adequacy of provisionsfor losses, the accuracy of estimates of resources required to complete ongoingprojects, 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. In addition, revenues from a large client mayconstitute a significant portion of our total revenues in any particularquarter.

 

**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 work with HCL and HCL America to jointlypursue, facilitate, manage and maintain business opportunities with Amdocs andBlue Cross Blue Shield for the provision of CRM services through the use of theservices offered by, and the particular experience and expertise of, Zamba, HCLAmerica and HCL.

 

 

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Thisagreement includes a process whereby Zamba and both HCL entities are toapproach clients jointly to obtain consulting agreements under which we willprovide project management and consultants based in the United States, and HCLwill provide consultants based in the United States and India.  All alliance contracts were to be in HCL’sname.  As part of this agreement, HCLagreed to fund 55% of the joint marketing expenses, including a portion of thepayroll for our personnel that are assigned to the alliance, and the “profits,”as defined in the agreement, from client contracts serviced under the allianceare to be shared roughly in the same ratio as the funding of the payroll.  Although we have not been able to generateany clients through this alliance program and HCL ceased providing funding thejoint marketing expenses after June 30, 2002, we have been able to utilize HCLpersonnel, including its personnel based in India, in a more traditionalsubcontracting role, in support of our engagements for our own clients.  We are currently in discussions with HCLregarding the structure of our ongoing relationship.  We expect that as a result of these discussions we will eitherterminate our relationship with HCL or enter into more of a traditionalsubcontracting and reseller arrangement under which each party will provideservices in support of the other party’s engagements, with no dedicatedmarketing activities.  

** **

**Results ofOperations**

 

**Three months ended September 30, 2002, compared to the threemonths ended September 30, 2001**

 

*Net Revenues*

Revenues decreasedapproximately 68% to $2.62 million in the third quarter of 2002 compared to$8.20 million in the third quarter of 2001. Revenues before reimbursementsdecreased approximately 68% to $2.45 million in the third quarter of 2002compared to $7.67 million in the third quarter of 2001.  The decrease was due principally to thecontinued significant 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 cancelled the projectsaltogether, resulting in an industry-wide decrease in services revenue.  In conjunction with the decrease in ourrevenues, our billable headcount decreased to 55 as of September 30, 2002,compared to 147 as of September 30, 2001. We are also experiencing strongdownward pricing pressures, which is adversely impacting our revenue.  

 

*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$1.86 million or approximately 71% of net revenues in the third quarter of 2002compared to $4.35 million or approximately 53% of net revenues in the thirdquarter of 2001.  The decrease inproject costs in dollar terms between these periods was due primarily to thedecrease in our headcount from 147 billable consultants as of September 30,2001, to 55 billable consultants as of September 30, 2002. However, these costsrepresented an increased percentage of our overall revenue in the third quarterof 2002, because our revenue decreased at a greater rate than we reducedproject and personnel costs. Additionally, we are experiencing strong downward pricing pressures,which is not only adversely impacting our revenue as described above, but ourgross margins as well.

 

*Reimbursable Expenses*

Reimbursable expenses consist of out-of-pocketexpenses incurred while providing services that are reimbursed by our clients.Pursuant to Financial Accounting Standards Board Staff Announcement (Topic No.D-103), which was effective for reporting periods beginning after December 15,2001, reimbursable expenses are separate line items in both revenue and cost ofrevenue. Prior to implementation of this Announcement, we had accounted forreimbursable expenses by offsetting the amounts we were paid against projectand personnel costs.  Reimbursableexpenses decreased approximately 69% to $168,000 in the third quarter of 2002compared to $534,000 in the third quarter of 2001. The decrease is due to theoverall decline in revenue and services performed during the same time period.

 

*Sales and Marketing*

Sales and marketing costsconsist primarily of salaries, employee benefits and travel expenses of salesand marketing personnel, as well as promotional costs.  Sales and marketing expenses were $246,000or approximately 9% of net revenues in the third quarter of 2002, compared to$1.32 million or approximately 16%

 

 

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of net revenues in the third quarter of2001.  The decrease between theseperiods was due to a reduction in the number of sales and marketing personnel,as well as lower commission expenses resulting from the decrease in revenue.

 

*General and Administrative*

General and administrativecosts consist primarily of expenses associated with our management, informationtechnology, training and recruiting, occupancy costs, and finance andadministrative groups.  General andadministrative expenses were $1.60 million or approximately 61% of net revenuesin the third quarter of 2002, compared to $2.90 million or approximately 35% ofnet revenues in the third quarter of 2001. The overall decrease in costs wasprimarily due to cost savings of $510,000 in salaries, $330,000 in office andequipment lease expense, and $125,000 in telephone and network connectionexpenses.  The increase in percentageterms is due primarily to our costs for occupancy, information technology andsalaries not decreasing at the same rate as our revenue. We anticipate thedollar amount of general and administrative expenses will decrease over thenext two fiscal quarters.

 

*Amortization of Intangibles*

Amortization of intangibleswas $0 in the third quarter of 2002 compared to $31,000 in the third quarter of2001.  The amortization in 2001 wasmainly due to tangible and identifiable intangible assets incurred from theacquisition of The QuickSilver Group, Inc. (“QuickSilver”) in September1998.  All tangible and identifiableintangible assets from the acquisition were completely amortized as of December31, 2001.

 

*Interest Income*

Interest income was $1,000in the third quarter of 2002 compared to $36,000 in the third quarter of2001.  The decrease is due to decreasesin our cash and investment accounts, which were used in operating and investingactivities.

 

*Interest Expense*

Interest expense was $94,000in the third quarter of 2002 compared to $49,000 in the third quarter of2001.  The increase in interest chargesis due to increased borrowings under our line of credit with Silicon ValleyBank, as well as amortization of our issuance costs related to the credit facility,which we established in February 2001.

 

*Gain on Sale of Investment*

                Gain on sale of investment was$310,000 in the third quarter of 2002 compared to $0 in the third quarter of2001. This represents a gain from our sales of a total of 51,667 shares of ourSeries A Preferred Stock in NextNet, as described in Note H of our Notes toConsolidated Financial Statements.

 

*Income Taxes*

We have incurred netoperating 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 for the quarterended September 30, 2002 was $1.04 million, or $0.03 per share, compared to anet loss for the quarter ended September 30, 2001 of $937,000, or $0.03 pershare.  Our net loss from operations forthe quarter ended September 30, 2002 was $1.26 million, compared to a net lossfrom operations for the quarter ended September 30, 2001 of $924,000.

 

**Nine months ended September 30, 2002, compared to the ninemonths ended September 30, 2001**

 

*Net Revenues*

Revenues decreasedapproximately 73% to $8.37 million in the nine months ended September 30, 2002compared to $30.58 million in the nine months ended September 30, 2001.Revenues before reimbursements decreased approximately 72% to $7.68 million inthe nine months ended September 30, 2002 compared to $27.50 million in the ninemonths ended September 30, of 2001.  Thedecrease was due principally to the continued significant reduction in thedemand for information technology consulting services, due to a generalslowdown in

 

 

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the economy. With theeconomic slowdown, many companies have either delayed decisions on informationtechnology consulting projects, or cancelled the projects altogether, resultingin an industry-wide decrease in services revenue. We are also experiencingstrong downward pricing pressures, which is adversely impacting our revenue. 

 

*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 $7.78million or approximately 93% of net revenues in the nine months ended September30, 2002 compared to $16.18 million or approximately 53% of net revenues in thenine months ended September 30, 2001. The decrease in project costs in dollar terms between these periods wasdue primarily to the decrease in our headcount from 147 billable consultants asof September 30, 2001, to 55 billable consultants as of September 30, 2002.However, these costs represented an increased percentage of our overall revenuein the nine months ended September 30, 2002, because our revenue decreased at agreater rate than we reduced project and personnel costs.  Additionally, we are experiencing strong downwardpricing pressures, which is not only adversely impacting our revenue asdescribed above, but also our gross margins.

 

*Reimbursable Expenses*

*               *Reimbursable expenses consist of out-of-pocket expenses incurred whileproviding services that are reimbursed by our clients. Pursuant to Financial AccountingStandards Board Staff Announcement (Topic No. D-103), which was effective forreporting periods beginning after December 15, 2001, reimbursable expenses areseparate 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 decreasedapproximately 78% to $686,000 in the nine months ended September 30, 2002compared to $3.08 million in the nine months ended September 30, 2001. Thedecrease is due to the overall decline in revenue and services performed duringthe same time period.

 

*Sales and Marketing*

Sales and marketing costsconsist primarily of salaries, employee benefits and travel expenses of salesand marketing personnel, as well as promotional costs.  Sales and marketing expenses were $1.58million or approximately 19% of net revenues in the nine months ended September30, 2002, compared to $4.53 million or approximately 15% of net revenues in thenine months ended September 30, 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 sales salaries being an increasingpercentage of revenue as a result of our revenue being lower than anticipatedin the nine months ended September 30, 2002.

 

*General and Administrative*

General and administrativecosts consist primarily of expenses associated with our management, informationtechnology, training and recruiting, occupancy costs, and finance andadministrative groups.  General andadministrative expenses were $6.18 million or approximately 74% of net revenuesin the nine months ended September 30, 2002, compared to $11.80 million orapproximately 39% of net revenues in the nine months ended September 30, 2001.The dollar decrease was primarily due to implementing cost savings measuresresulting in a decrease of $2.20 million in salaries, a decrease of $670,000 inbad debt expense, a decrease of $500,000 in recruiting fees, a decrease of$300,000 in travel and entertainment expenses, and a decrease of $500,000 intelephone and network connection expenses. The increase in percentage terms isdue primarily to our costs for occupancy, information technology and salariesnot decreasing at the same rate as our revenue.  

 

*Restructuring and Unusual Charges*

Restructuringand unusual charges were $3.32 million in the nine months ended September 30,2002 compared to $2.19 million in the nine months ended September 30,2001.  Included in the current yearamount was a $2.53 million charge for facility closings, subleasing, and leasetermination costs, as well as $350,000 in severance pay related to headcount reductions, including three vice presidents,in the first quarter of 2002. The facility charges included $276,000 for closing the Colorado Springs,Colorado and Boston, Massachusetts facilities, $290,000 for reducing the amountof space leased in the Minneapolis, Minnesota facility by approximately 60%,and $1.96 million for increasing the accrual for our St. Paul, Minnesota andCampbell,

 

 

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California facilities to amounts consistentwith buy-out offers made by our landlords. We also incurred a $443,000 non-cash compensation charge arising out ofthe exercise by Paul Edelhertz, a member of our board of directors, of hisright to assign to us an aggregate of 250,000 shares of our common stock inexchange for our cancellation of a promissory note issued to us by Mr.Edelhertz bearing a principal balance of $500,000 and accrued interest throughthe date of cancellation of $43,250. This transaction relates to an agreement dated December 26, 2000, asamended on August 2, 2001.  Also, weundertook a restructuring action in the second quarter of 2001, when werecorded a restructuring charge of $2.19 million.  Our restructuring charge in the second quarter of 2001 wascomposed of $777,000 for severance payments, $123,000 for otheremployee-related costs, $1.173 million for facility closings and other leasetermination costs, $87,000 to resolve a contract dispute with a vendor, and$28,000 of other related restructuring charges.  The facilities portion of the restructuring charge in the secondquarter of 2001 includes new and additional lease termination costs and otherexpenses associated with our decisions to consolidate our operations and closeunproductive or duplicative office locations in St. Paul, Minnesota andPleasanton and Carlsbad, California.  

 

*Amortization of Intangibles and Non-cash Compensation*

Amortization of intangibleswas $0 in the nine months ended September 30, 2002 compared to $106,000 in thenine months ended September 30, 2001. The amortization in 2001 was mainly due to tangible and identifiableintangible assets incurred from the acquisition of The QuickSilver Group, Inc.(“QuickSilver”) in September 1998.  Alltangible and identifiable intangible assets from the acquisition werecompletely amortized as of December 31, 2001.

 

*Interest Income*

Interest income was $12,000in the nine months ended September 30, 2002 compared to $126,000 in the ninemonths ended September 30, 2001.  Thedecrease is due to decreases in our cash and investment accounts, which wereused in operating and investing activities.

 

*Interest Expense*

Interest expense was$219,000 in the nine months ended September 30, 2002 compared to $128,000 inthe nine months ended September 30, 2001. The increase in interest charges isdue to increased borrowings under our line of credit with Silicon Valley Bank,as well as amortization of our issuance costs related to the credit facility,which we established in February 2001.

 

*Gain on Sale of Investment*

                Gain on sale of investment was$2.96 million in the nine months ended September 30, 2002 compared to $0 in thenine months ended September 30, 2001. This represents a gain from our sales ofa total of 714,997 shares of our Series A Preferred Stock in NextNet for anaggregate consideration of $2.96 million, net of a finders fee of $25,000 toRalph Muse, a former CEO of NextNet, as described in Note H of our Notes toConsolidated Financial Statements.

 

*Income Taxes*

We have incurred netoperating 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*

As a result of the above,our net loss for the nine months ended September 30, 2002 was $8.42 million, or$0.22 per share, compared to a net loss for the nine months ended September 30,2001 of $7.31 million, or $0.22 per share. Our net loss from operations for the nine months ended September 30,2002 was $11.18 million, compared to a net loss from operations for the ninemonths ended September 30, 2001 of $7.30 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’s Discussionand Analysis of Financial Condition

 

 

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and Results of Operations where these policies affectour reported and expected financial results. Our preparation of this Form 10-Q requires us to make estimates andassumptions that affect the reported amount of assets and liabilities,disclosure of contingent assets and liabilities as of the date of our financialstatements, and the reported amounts of revenue and expenses during thereporting period.  There can be noassurance that actual results will not differ from those estimates.

 

Ourcritical accounting policies are as follows:

•      Revenue Recognition;

•      Allowance for DoubtfulAccounts; and

•      Investmentin NextNet Wireless, Inc.

 

For a detailed discussion of the application of these and otheraccounting policies, see Note 1 of the notes to the consolidated financialstatements in our 2001 Annual Report on Form 10-K.

 

***Liquidity and Capital Resources***

 

At September 30, 2002, wehad approximately $326,000 in cash and cash equivalents, compared to $1.33million at December 31, 2001. As of September 30, 2002, we had no significantcapital spending or purchase commitments, except for a $500,000 purchase orderfor software licenses and training. We have not formally completed the purchaseagreement for this, and do not intend to complete this purchase.  As of September 30, 2002, we had a negativeworking capital of $4.34 million, and a stockholder's deficit of $4.14 million.

 

Cash used in operatingactivities was $7.90 million for the nine months ended September 30, 2002 andresulted primarily from a loss before depreciation and amortization, non-cashcompensation, and gain on sale of investment in NextNet, of $10.59 million,which was offset by an increase in accrued expenses of $1.59 million and adecrease in notes receivable of $500,000. Cash used in operating activities was $5.13 million for the nine monthsended September 30, 2001, due primarily to a net loss of  $7.31 million, offset by a decrease inaccounts receivable of $2.19 million.

 

Cash provided frominvesting activities was $5.78 million for the nine months ended September 30,2002, and resulted primarily from proceeds of $5.05 million from the sale of aportion of our NextNet shares.  Cash usedin investing activities was $830,000 for the nine months ended September 30,2001 and resulted primarily from the purchase of property and equipment.

 

Cash provided byfinancing activities was $1.12 million for the nine months ended September 30,2002 and consisted primarily of $1.71 million in cash received from sale of ourcommon stock, offset by a decrease of $463,000 in borrowings under our line ofcredit.  Cash provided by financingactivities was $4.66 million for the nine months ended September 30, 2001 andconsisted primarily of cash received from the sale of common stock of $2.24million and proceeds from the line of credit of $2.80 million.

 

 

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Future payments due under debt and lease obligations are as follows (inthousands):

 

| **Year Ending December 31,** |   | **Bank Line  Of Credit** |   | **Notes  Payable** |   | **Non  Cancelable  Operating  Leases** |   | **Total** |
|-----------------------------------|--------|--------------------------|--------|--------------------|--------|----------------------------------------|--------|-----------|
| 2002                              |   | $                        | 637    |               | $      | 17                                     |   | $         | 247 |   | $ | 901 |
| 2003                              |   | 3⁄4                   |   | 258                |   | 967                                    |   | 1,225     |
| 2004                              |   | 3⁄4                   |   | 164                |   | 742                                    |   | 906       |
| 2005                              |   | 3⁄4                   |   | 3⁄4             |   | 388                                    |   | 388       |
| 2006                              |   | 3⁄4                   |   | 3⁄4             |   | 3⁄4                                 |   | 3⁄4    |
| Later                             |   | 3⁄4                   |   | 3⁄4             |   | 3⁄4                                 |   | 3⁄4    |
| Total                             |   | $                        | 637    |               | $      | 439                                    |   | $         | 2,344 |   | $ | 3,420 |

 

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.  Our alleged default under alease for furniture as set forth more fully in Note I is technically an"Event of Default" under the Accounts Receivable PurchaseAgreement.  Upon default, Silicon ValleyBank may elect from remedies including declaring all amounts paid to us underthe agreement due and payable in full, or ceasing to buy receivables fromus.  Silicon Valley Bank has not electedto enforce this provision.  If SiliconValley Bank decides to enforce this provision, or otherwise does not purchasereceivables from us, our ability to fund our operations could be materiallyharmed.  The Accounts ReceivablePurchase Agreement replaces a secured revolving credit facility that weestablished with Silicon Valley Bank on February 27, 2001, and amended on August2, 2001 and December 31, 2001.    Thisfacility was to expire on December 31, 2002, but was replaced by the AccountsReceivable Purchase Agreement.  Amountsoutstanding under the revolving credit facility were converted to beingoutstanding under the Accounts Receivable Purchase Agreement.

 

In the second quarter of2002, we entered into stock purchase agreements to sell certain of our Series APreferred Stock in NextNet to various parties. The total proceeds received were$1,480,000 in April, $500,000 in May and $310,000 in June.  We also received an additional $600,000 inSeptember and $200,000 in October from these sales.  In the third quarter of 2002, we entered into additional stockpurchase agreements to sell certain of our Series A Preferred Stock in NextNetto various parties. The total proceeds received were $150,000 in August and$30,000 in September.  Also, in June2002, we received an advance in the amount of $450,000 from Joseph B. Costello,our chairman. In July 2002, we received an additional $850,000 in advances fromMr. Costello. On August 6, 2002, these advances were converted to shares ofZamba’s NextNet Series A Preferred Stock.**** See Note H to our Notes to ConsolidatedFinancial Statements for additional discussion regarding our sales of NextNetstock.

 

On November 5, 2002, weannounced the closing of a loan agreement with Entrx Corporation (“Entrx”),under which Entrx agreed to lend us up to $2.5 million in three separateadvances.  We received the first advanceof $1.00 million on November 4, 2002. The second and third advances will be made only upon the achievement ofcertain prescribed business milestones. See Note J of the Notes to ConsolidatedFinancial Statements for additional discussion.

 

We believe that our existingcash and cash equivalents, together with cash provided from operations, ourborrowings from the Accounts Receivable Purchase Agreement with Silicon ValleyBank, and the receipt of $154,000 in October from a private investor for aportion of our NextNet investment and $1.00 million in November in connectionwith our loan from Entrx, should be sufficient to meet our working capital andcapital expenditure requirements through at least January 31, 2003.  We should be able to meet our expenditurerequirements at least through April 30, 2003, if we receive the second andthird advances under the loan

 

 

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agreement with Entrx, although we can provideno assurance that these amounts will be sufficient to fund our business.  In the event that we do not receive the secondor third advances under the Entrx loan agreement, and are unable to obtainfunding from other sources, our financial position could be materially harmedand we could become unable to pay our creditors.

 

We will continue to explorepossibilities for additional financing, which may include debt, equity, orother strategic alternatives that may be available to us, including a potentialsale of 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 adversely affects our ability to obtain funds through ouraccounts receivable, and we are unable to obtain additional financing, we maynot be able to meet our cash requirements beyond January 31, 2003.  Additionally, if we receive an adverse judgment in the mattersdescribed in the discussion of “Legal Proceedings” set forth in Part II of thisQuarterly Report on Form 10-Q, our financial position could be materiallyadversely affected and we may not be able to continue as a going concern.  Our ability to continue as a going concerndepends upon our ability to continue to access our Accounts Receivable PurchaseAgreement with Silicon Valley Bank, and obtain the second and third advances of$750,000 each under our loan agreement with Entrx, although we can provide noassurance that these amounts will be sufficient to fund our business.  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 ofbusiness.  These financial statements donot include any adjustments that might result if we were forced to discontinueour operations.

 

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

 

We are exposed to marketrisk from changes in security prices and interest rates. Market fluctuationscould impact our results of operations and financial condition. We are exposedto certain market risks based on our outstanding debt obligations of $439,000at September 30, 2002, as well as our Accounts Receivable Purchase Agreementwith Silicon Valley Bank, under which $647,000 was outstanding at September 30,2002. The interest rates charged on our long-term debt obligations are 7.0%,and these obligations mature quarterly through December 2003.  Borrowings under the Accounts ReceivablePurchase Agreement bear interest at a monthly rate of 1% of the average dailybalance outstanding during the period. Additionally, on each reconciliation date, we pay an administrative feeequal to 0.25% of the face amount of each receivable purchased by SiliconValley Bank during that reconciliation period. The interest is payable monthly. We do not invest in any derivativefinancial instruments. Excess cash is invested in short-term low-risk vehicles,such as money market investments. Changes in interest rates are not expected tohave a material adverse effect on our business, financial condition or resultsof operations.

 

**Item 4.  Controls and Procedures**

In order to ensure that theinformation we must disclose in our filings with the Securities and ExchangeCommission is recorded, processed, summarized and reported on a timely basis,we have formalized our disclosure controls and procedures. Our principalexecutive officer and principal financial officer have reviewed and evaluatedour disclosure controls and procedures as defined in Rules 13a-14(c) and15d-14(c) under the Securities Exchange Act of 1934, as amended (the "ExchangeAct") as of a date within 90 days prior to the filing date of thisreport (the "Evaluation Date"). Based on such evaluation, suchofficers have concluded that, as of the Evaluation Date, our disclosurecontrols and procedures are effective in bringing to their attention on atimely basis material information relating to Zamba required to be included inour periodic filings under the Exchange Act.

Since the Evaluation Date,there have not been any significant changes in our internal controls, or inother factors that could significantly affect these controls subsequent to theEvaluation Date.

 

**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. When used in this Quarterly Report on Form

 

 

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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-looking statementsrepresent our expectations or beliefs concerning future events, includingstatements regarding our ability to reverse our recent revenue declines andobtain cash-flow profitability, our ability to obtain sufficient financing ifwe are unable to fund our operations from cash-flow, our ability to realize theexpected benefits from our restructuring initiatives, the effect of the recentsale of the CRM products of a major CRM developer on our business, our abilityto resolve our alliance with HCL or otherwise be able to access offshoreconsulting resources, our ability to attract and retain customers, our abilityto adjust the mix of our services to meet the needs of the market, our abilityto adapt to rapidly changing technologies in the CRM industry, the ability ofour partners 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,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 ability to grow revenues from acquiredcompanies, possible changes in collections of accounts receivable and notesreceivable, our ability to protect and reuse our intellectual property, changesin general economic conditions and interest rates, and other factors identifiedin our filings with the Securities and Exchange Commission, including thoseidentified in Exhibit 99.01 to this Quarterly Report on Form 10-Q. We disclaimany intention or obligation to update or revise any forward-looking statements,whether as a result of new information, future events 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 October 7, 2002, KeyEquipment Finance International, Inc. filed a complaint against us in HennepinCounty Minnesota District Court alleging that we breached three leases with Keyfor office furniture.  We filed ouranswer to this complaint on October 11, 2002. Monthly rent on these leases was approximately $22,000.  As of May 20, 2002, we had not paid rent forthe months of April and May 2002, and Key declared us to be in default of theseleases.  In early June, Key recovered aletter of credit of approximately $263,000 for these leases.  Upon default, the lease allows Key torecover the amounts of unpaid rent as of the date payment is requested for theunpaid rent, plus interest on the unpaid rent for the period running from thedate payment was requested through the date of payment, plus the “StipulatedLoss Value” for the equipment.  We arealso potentially liable for Key’s attorneys’ fees.  Because no Stipulated Loss Value was attached to the contract, webelieve that Key will only be entitled to the amount of unpaid rent as of thedate payment was requested to be made, plus any interest that accrues on theunpaid rent, which is less than the amount of money Key recovered through theletter of credit.  We have no assurancethat we will be successful in our position regarding our liability for theStipulated Loss Value.  We have returnedmost of the leased furniture to Key, and we believe that Key has already soldsome or all of the equipment that we returned. The amounts Key received from sale of the equipment may reduce theamount, if any, that we owe Key under the leases.  Key has requested $375,000 to settle this matter.  We have no assurance that a judgment againstus will not meet or exceed the amount requested by Key for settlement or thatwe will not also be found liable for Key’s attorneys’ fees.

 

On August 5, 2002, ourformer president and CEO, Doug Holden, notified us that he believes we breachedhis 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 of

 

 

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his options.  We believe that wehave valid defenses to Mr. Holden's claims and/or that Mr. Holden is notentitled to the items he is requesting. The timing and ultimate resolution of Mr. Holden's claims are uncertainat this time.

 

We are attempting to resolvethese matters, but we cannot be certain that we will be able to successfullyresolve these matters on favorable terms, and we cannot be certain that we willbe successful in litigation.  If we areunable to resolve these matters, and if we lose the litigation for thesematters, our financial position could be materially harmed.   

 

We have settled some of theactual or threatened legal proceedings that were described in our QuarterlyReport on Form 10-Q for the quarter ended June 30, 2002.  These matters include the following:

 

On October 10, 2002, wereached an agreement with Army Corps Operating Associates (“Army Corps”), toterminate our lease for a facility in St. Paul, Minnesota, and settle relatedlitigation.  Under the termination andrelease for this facility, we will pay a total of $500,000 in variousinstallment payments from October 2002 through September 2003.  As of November 14, 2002, we have paid$105,000 of the settlement amount.

 

On October 10, 2002, wereached an agreement with WTA Campbell Technology Park LLC (“WTA”), toterminate our lease for a facility in Campbell, California, and settle relatedlitigation.  Under the termination andrelease for this facility, we will pay a total of $729,300 in various installmentpayments from October 2002 through August 2003.  As of November 14, 2002, we have paid $151,000 of the settlementamount.

 

On September 27, 2002, weentered into a settlement agreement with a furniture lessor, Fidelity EquipmentLeasing, that had threatened to bring an action against us for an allegedbreach of five equipment leases.  Weagreed to pay a total of $120,000 from September 2002 through April 2003 inexchange for termination of the lease and a release of Fidelity’s claims.  As of November 14, 2002, we have paid$45,000 of the settlement amount.

 

We are also subject to othervarious legal proceedings and claims that we do not believe are material eitherseparately or in the aggregate.

 

Item 2.    Changesin Securities and Use of Proceeds

 

                None.

 

Item 3.    DefaultsUpon Senior Securities

 

                None.

 

Item 4.    Submissionof Matters to a Vote of Security Holders

 

                None.                     

 

Item 5.    Other Information

 

                OnOctober 16, 2002, the Audit Committee of our Board of Directors approved theprovision of the following services to our company by KPMG LLP, our independentpublic accountants: (i) general tax compliance services; and (ii) otherservices approved by the Chairman of the Audit Committee, provided that theother services are allowable under the auditor independence provisions of theSarbanes-Oxley Act.

 

Item 6.    Exhibitsand Reports on Form 8-K

 

(a)           Exhibits: (See attached exhibitindex)

 

(b)           Reportson Form 8-K:

 

 

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OnAugust 20, 2002, we filed a report on Form 8-K to report the following:

 

On August 20, 2002, wesubmitted two requests for arbitration to the American Arbitration Association.Both claims are against private investors who had agreed in stock purchaseagreements dated April 26, 2002, to each pay us $199,998 on August 1, 2002, inexchange for each investor receiving a total of 33,333 shares of our Series APreferred Stock in NextNet. We were seeking to recover the aggregateamount of $399,996 that was due on August 1, 2002, as well as our costs and anyother damages we incurred because of the failures of the two investors to payus on the contract payment date. Each investor agreed under the April 26, 2002,stock purchase agreement to pay us approximately $600,000 in September 2002 (asdiscussed below).

 

On August 29, 2002, we fileda report on Form 8-K to report the following:

 

On August 27,2002, at a regular meeting of our Board of Directors, we accepted theresignations of Subrahmanyan Raman and John Olsen from our Board of Directorsand appointed Ashok Jain to replace Mr. Raman on our Board of Directors. BothMr. Raman and Mr. Jain are executives with HCL Technologies ("HCL"),which is based in India. Mr. Raman is the Chief Operating Officer of HCL andjoined our board in March 2002, following our execution of a strategic allianceagreement with HCL. Mr. Jain is an executive vice president of HCL and adirector of HCL Technologies America. Mr. Olsen resigned because of the timecommitments involved with his role as president and chief operating officer ofBusiness Objects, which cause him to spend a significant amount of time inEurope. We currently do not have plans to replace Mr. Olsen on our Board ofDirectors.

 

On September 9, 2002, wefiled a report on Form 8-K to report the following:

 

OnSeptember 3, 2002, we received approximately $600,000 from two privateinvestors in exchange for each investor receiving shares of our Series APreferred Stock in NextNet. The amounts paid represent all amounts due fromeach investor on August 1, 2002, and the entire amount due from one investor inSeptember 2002, pursuant to agreements we had signed with each investor. As aresult of our receipt of these payments, we withdrew arbitration proceedings wehad instituted against the two private investors and reported on a CurrentReport on Form 8-K on August 20, 2002.

 

On November 5, 2002, wefiled a report on Form 8-K to report the following:

 

On November 5, 2002, weannounced the closing of a loan agreement with Entrx, under which Entrx agreedto lend us up to $2.50 million in three separate advances, subject to certaincontingencies.  The loan agreement, the promissory note, and the escrowand pledge security agreement entered into in connection with the loan wereattached as exhibits to the Current Report on Form 8-K that reported the loan.

 

 

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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/  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:  November 14, 2002 |

 

 

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I, Norman D. Smith, certify that: 

 

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

2.   Based onmy knowledge, 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 onmy knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, 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) designed such disclosurecontrols and procedures to ensure that material information relating to theregistrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which thisquarterly report is being prepared;

b) evaluated theeffectiveness of the registrant's disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the"Evaluation Date"); and

c) presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

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) all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant's ability to record, process, summarize andreport financial data and have identified for the registrant's auditors anymaterial weaknesses in internal controls; and

b) any fraud, whether or notmaterial, that involves management or other employees who have a significantrole 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:  | November 14, 2002       |   |
|--------|-------------------------|--------|
|   |                    |   |
|   | /s/ Norman D. Smith     |   |
|   |                    |   |
|   | Chief Executive Officer |   |

 

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I, Michael H. Carrel, certify that:

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

2.   Based onmy knowledge, 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 onmy knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, 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) designed such disclosurecontrols and procedures to ensure that material information relating to theregistrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which thisquarterly report is being prepared;

b) evaluated theeffectiveness of the registrant's disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the"Evaluation Date"); and

c) presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

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) all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant's ability to record, process, summarize andreport financial data and have identified for the registrant's auditors anymaterial weaknesses in internal controls; and

b) any fraud, whether or notmaterial, that involves management or other employees who have a significantrole 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:  | November 14, 2002       |   |
|--------|-------------------------|--------|
|   |                    |   |
|   | /s/ Michael H. Carrel   |   |
|   |                    |   |
|   | Chief Financial Officer |   |

 

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EXHIBIT INDEX

 

 
| EXHIBIT NUMBER | TITLE                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|----------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.01          | Stock Purchase Agreement between John T. Johnson and Zamba  Corporation, dated August 9, 2002                                                                                                                                                                                                                                                                                                                                                         |
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.02          | Stock Purchase Agreement between Bob Tallard and Zamba Corporation,  dated August 9, 2002                                                                                                                                                                                                                                                                                                                                                             |
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.03          | Stock Purchase Agreement between Herbert P. Koch and Zamba  Corporation, dated August 13, 2002                                                                                                                                                                                                                                                                                                                                                        |
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.04          | Stock Purchase Agreement between Brian Lawton and Zamba Corporation,  dated August 19, 2002                                                                                                                                                                                                                                                                                                                                                           |
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.05          | Settlement Agreement and Release between Fidelity Leasing, Zamba  Corporation and Michael H. Carrel, dated September 24, 2002                                                                                                                                                                                                                                                                                                                         |
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.06          | Settlement Agreement and Release between Square 24 Associates and  Zamba Corporation, dated October 4, 2002                                                                                                                                                                                                                                                                                                                                           |
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.07          | Settlement Agreement and Release by and between WTA Campbell  Technology Park, LLC and Zamba Corporation, dated October 9, 2002                                                                                                                                                                                                                                                                                                                       |
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.08          | Lease Termination Agreement and Release, by and between Army Corps  Centre Operating Associates, Limited Partnership, a/k/a Army Corps Operating  Associates, LP, a New Mexico Limited Partnership, successor-in-interest to CC  Commercial LP ("Army Corps"), Zamba Corporation, a Delaware Corporation  ("Zamba") and ZCA Corporation, a Minnesota Corporation f/k/a  Camworks, Inc., ("ZCA"), dated October 10, 2002 |
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.09          | Loan Agreement by and between Entrx Corporation and Zamba Coporation,  dated November 5, 2002, (Incorporated by reference to the Registrant's  Current Report on Form 8-K dated November 5, 2002).                                                                                                                                                                                                                                                    |
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 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                                                                                                                                                                                                                                                                                                                       |

 

 

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