**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

### **WASHINGTON,D.C.  20549**

 

**FORM 10-Q**

***(Mark One)***

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

 

**For the quarterly period ended March 31, 2004**

 

**OR**

 

| **o** |   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|--------|-----------------------------------------------------------------------------------------------|

 

|   |   | **For the transition period from                       to                   ** |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**Commission FileNumber 0-22718**

 

**ZAMBA CORPORATION**

(Exact name of Registrant as specified in its charter)

 

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

 

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

(Address of principal executive offices, including zip code)

 

**(952) 832-9800**

(Registrant’s telephone number, including area code)

 

Indicate by check mark whetherthe Registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the Registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days.
| YES | ý |   | NO | o |
|-----|--------|--------|----|---|

 

Indicate by check mark whetherthe Registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act).
| YES | o |   | NO | ý |
|-----|---|--------|----|--------|

 

Indicate the number of sharesoutstanding of each of the issuer’s classes of common stock, as of the latestpracticable date.

 

| **Class**                     |   | **Outstanding at  May 7, 2004** |
|-------------------------------|--------|---------------------------------|
| Common Stock, $0.01 par value |   | 38,900,470                      |

 

 

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ZAMBA CORPORATION

 

INDEX

 

PART I —Financial Information

 
| Item 1.                           | Financial Statements (Unaudited)                                                            |   |
|-----------------------------------|---------------------------------------------------------------------------------------------|--------|
|                              |                                                                                        |   |
|                              | Consolidated Statements of Operations for  the  Three Months Ended March 31, 2004 and 2003  |   |
|                              |                                                                                        |   |
|                              | Consolidated Balance Sheets as of  March 31, 2004 and December 31, 2003                     |   |
|                              |                                                                                        |   |
|                              | Consolidated Statements of Cash Flows for  the  Three Months Ended March 31, 2004 and 2003  |   |
|                              |                                                                                        |   |
|                              | 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                        |                                                                                        |

 

2

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**Part I****. Financial Information**

 

**Item 1****:  Financial Statements**

 

**ZAMBA CORPORATIONCONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)**

 

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

 
|                                                |   | **Three  months ended  March 31,** |       |
|-----------------------------------------------------|--------|------------------------------------|------------|
|                                                |   | **2004**                           |       | **2003** |   |
| **Revenues:**                                       |   |                               | ** ** |   | ** ** |
| **Professional services**                           |   | **$**                              | **2,161**  | ** ** | **$** | **2,510** | ** ** |
| **Reimbursable expenses**                           |   | **186**                            | ** ** | **264** | ** ** |
| **Total revenues**                                  |   | **2,347**                          | ** ** | **2,774** | ** ** |
|                                                |   |                               | ** ** |   | ** ** |
| **Costs and expenses:**                             |   |                               | ** ** |   | ** ** |
| **Project and personnel costs**                     |   | **1,231**                          | ** ** | **1,442** | ** ** |
| **Reimbursable expenses**                           |   | **186**                            | ** ** | **264** | ** ** |
| **Sales and marketing**                             |   | **197**                            | ** ** | **249** | ** ** |
| **General and administrative**                      |   | **679**                            | ** ** | **782** | ** ** |
| **Total costs and expenses**                        |   | **2,293**                          | ** ** | **2,737** | ** ** |
|                                                |   |                               | ** ** |   | ** ** |
| **Income from operations**                          |   | **54**                             | ** ** | **37** | ** ** |
|                                                |   |                               | ** ** |   | ** ** |
| **Other income (expense):**                         |   |                               | ** ** |   | ** ** |
| **Gain on sale of NextNet shares**                  |   | **743**                            | ** ** | **1,853** | ** ** |
| **Interest expense**                                |   | **(23**                            | **)**      | **(27** | **)** |
| **Other income, net**                               |   | **720**                            | ** ** | **1,826** | ** ** |
|                                                |   |                               | ** ** |   | ** ** |
| **Income before extraordinary item**                |   | **774**                            | ** ** | **1,863** | ** ** |
|                                                |   |                               | ** ** |   | ** ** |
| **Extraordinary gain from extinguishment of  debt** |   | **—**                         | ** ** | **198** | ** ** |
|                                                |   |                               | ** ** |   | ** ** |
| **Net income**                                      |   | **$**                              | **774**    | ** ** | **$** | **2,061** | ** ** |
|                                                |   |                               | ** ** |   | ** ** |
| **Basic and diluted net income per share:**         |   |                               | ** ** |   | ** ** |
| **Income before extraordinary item**                |   | **$**                              | **0.02**   | ** ** | **$** | **0.05** | ** ** |
| **Extraordinary gain from extinguishment of  debt** |   | **—**                         | ** ** | **—** | ** ** |
| **Basic and diluted net income per share**          |   | **$**                              | **0.02**   | ** ** | **$** | **0.05** | ** ** |
|                                                |   |                               | ** ** |   | ** ** |
| **Weighted average shares outstanding:**            |   |                               | ** ** |   | ** ** |
| **Basic**                                           |   | **38,892**                         | ** ** | **38,823** | ** ** |
| **Diluted**                                         |   | **38,912**                         | ** ** | **39,525** | ** ** |

 

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

 

3

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**ZAMBA CORPORATION****CONSOLIDATED BALANCE SHEETS****(Unaudited)**

 

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

 
|                                                                                                                                                                  |   | **March 31,  2004** |       | **December 31,  2003** |       |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|------------|------------------------|------------|
| **ASSETS**                                                                                                                                                            |   |                |       |                   |       |
| **Current assets:**                                                                                                                                                   |   |                |       |                   |       |
| **Cash and cash equivalents**                                                                                                                                         |   | **$**               | **109**    | ** **             | **$**      | **699** | ** ** |
| **Accounts receivable, net**                                                                                                                                          |   | **1,086**           | ** ** | **618**                | ** ** |
| **Unbilled receivables**                                                                                                                                              |   | **169**             | ** ** | **79**                 | ** ** |
| **Prepaid expenses and other current assets**                                                                                                                         |   | **118**             | ** ** | **108**                | ** ** |
| **Total current assets**                                                                                                                                              |   | **1,482**           | ** ** | **1,504**              | ** ** |
| **Property and equipment, net**                                                                                                                                       |   | **271**             | ** ** | **326**                | ** ** |
| **Other assets**                                                                                                                                                      |   | **56**              | ** ** | **57**                 | ** ** |
| **Total assets**                                                                                                                                                      |   | **$**               | **1,809**  | ** **             | **$**      | **1,887** | ** ** |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)**                                                                                                               |   |                |       |                   |       |
| **Liabilities:**                                                                                                                                                      |   |                |       |                   |       |
| **Line of credit**                                                                                                                                                    |   | **$**               | **482**    | ** **             | **$**      | **436** | ** ** |
| **Accounts payable**                                                                                                                                                  |   | **113**             | ** ** | **128**                | ** ** |
| **Accrued expenses**                                                                                                                                                  |   | **809**             | ** ** | **919**                | ** ** |
| **Deferred revenue**                                                                                                                                                  |   | **196**             | ** ** | **187**                | ** ** |
| **Deferred gain on sale of investment**                                                                                                                               |   | **—**          | ** ** | **783**                | ** ** |
| **Total current liabilities**                                                                                                                                         |   | **1,600**           | ** ** | **2,453**              | ** ** |
| **Commitments and contingencies**                                                                                                                                     |   |                |       |                   |       |
| **Stockholders’ equity (deficit):**                                                                                                                              |   |                |       |                   |       |
| **Common stock, $0.01 par value, 120,000  shares authorized, 38,900 and 38,892 shares issued and outstanding at March  31, 2004 and December 31, 2003, respectively** |   | **389**             | ** ** | **389**                | ** ** |
| **Additional paid-in capital**                                                                                                                                        |   | **86,081**          | ** ** | **86,080**             | ** ** |
| **Accumulated deficit**                                                                                                                                               |   | **(86,261**         | **)**      | **(87,035**            | **)**      |
| **Total stockholders’ equity (deficit)**                                                                                                                         |   | **209**             | ** ** | **(566**               | **)**      |
|                                                                                                                                                                  |   |                |       |                   |       |
| **Total liabilities and stockholders’ equity  (deficit)**                                                                                                        |   | **$**               | **1,809**  | ** **             | **$**      | **1,887** | ** ** |

 

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

 

4

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

 

**(In thousands)**

 
|                                                                               |   | **Three  months ended  March 31,** |       |
|------------------------------------------------------------------------------------|--------|------------------------------------|------------|
|                                                                               |   | **2004**                           |       | **2003** |   |
|                                                                               |   |                               |       |   |   |
| **Cash flows from operating activities:**                                          |   |                               | ** ** |   | ** ** |
| **Net income**                                                                     |   | **$**                              | **774**    | ** ** | **$** | **2,061** | ** ** |
| **Adjustments to reconcile net income to net  cash used in operating activities:** |   |                               | ** ** |   | ** ** |
| **Depreciation and amortization**                                                  |   | **55**                             | ** ** | **83** | ** ** |
| **Provision for bad debts**                                                        |   | **(20**                            | **)**      | **—** | ** ** |
| **Gain on disposal of fixed assets**                                               |   | **—**                         | ** ** | **(5** | **)** |
| **Gain on sale of NextNet shares**                                                 |   | **(743**                           | **)**      | **(1,853** | **)** |
| **Extraordinary gain on extinguishment of  debt**                                  |   | **—**                         | ** ** | **(198** | **)** |
| **Changes in operating assets and  liabilities:**                                  |   |                               | ** ** |   | ** ** |
| **Accounts receivable**                                                            |   | **(448**                           | **)**      | **(637** | **)** |
| **Unbilled receivables**                                                           |   | **(90**                            | **)**      | **330** | ** ** |
| **Prepaid expenses and other assets**                                              |   | **(9**                             | **)**      | **280** | ** ** |
| **Accounts payable**                                                               |   | **(14**                            | **)**      | **(448** | **)** |
| **Accrued expenses and other long-term  liabilities**                              |   | **(150**                           | **)**      | **(637** | **)** |
| **Deferred revenue**                                                               |   | **9**                              | ** ** | **57** | ** ** |
| **Net cash used in operating activities**                                          |   | **(636**                           | **)**      | **(967** | **)** |
|                                                                               |   |                               | ** ** |   | ** ** |
| **Cash flows from investing activities:**                                          |   |                               | ** ** |   | ** ** |
| **Purchase of property and equipment**                                             |   | **—**                         | ** ** | **(3** | **)** |
| **Proceeds from sale of NextNet shares**                                           |   | **—**                         | ** ** | **750** | ** ** |
| **Proceeds from sale of equipment**                                                |   | **—**                         | ** ** | **6** | ** ** |
| **Net cash provided by investing activities**                                      |   | **—**                         | ** ** | **753** | ** ** |
|                                                                               |   |                               | ** ** |   | ** ** |
| **Cash flows from financing activities:**                                          |   |                               | ** ** |   | ** ** |
| **Line of credit, net**                                                            |   | **45**                             | ** ** | **42** | ** ** |
| **Proceeds from short-term loan**                                                  |   | **—**                         | ** ** | **750** | ** ** |
| **Proceeds from sale of common stock**                                             |   | **1**                              | ** ** | **1** | ** ** |
| **Payments of long-term debt**                                                     |   | **—**                         | ** ** | **(167** | **)** |
| **Net cash provided by financing activities**                                      |   | **46**                             | ** ** | **626** | ** ** |
|                                                                               |   |                               | ** ** |   | ** ** |
| **Net increase (decrease) in cash and cash  equivalents**                          |   | **(590**                           | **)**      | **412** | ** ** |
| **Cash and cash equivalents, beginning of  period**                                |   | **699**                            | ** ** | **549** | ** ** |
| **Cash and cash equivalents, end of period**                                       |   | **$**                              | **109**    | ** ** | **$** | **961** | ** ** |
|                                                                               |   |                               | ** ** |   | ** ** |
| **Supplemental Schedule for Disclosures of  Cash Flow Information:**               |   |                               | ** ** |   | ** ** |
|                                                                               |   |                               | ** ** |   | ** ** |
| **Cash paid during the period for interest**                                       |   | **$**                              | **25**     | ** ** | **$** | **26** | ** ** |
|                                                                               |   |                               | ** ** |   | ** ** |
| **Non-cash investing and financing activity:**                                     |   |                               | ** ** |   | ** ** |
|                                                                               |   |                               | ** ** |   | ** ** |
| **Conversion of note payable into sale of  NextNet shares**                        |   | **$**                              | **—** | ** ** | **$** | **1,750** | ** ** |
| **Conversion of long-term debt into sale of  NextNet shares**                      |   | **$**                              | **—** | ** ** | **$** | **71** | ** ** |

 

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

 

5

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ZAMBA CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)

 

Note A.  Basis of Presentation:

 

The unauditedconsolidated financial statements of Zamba Corporation as of March 31, 2004,and for the three month periods ended March 31, 2004 and 2003, reflect alladjustments (which include only normal recurring adjustments, except asdisclosed in the footnotes) necessary, in the opinion of management, to fairlystate our financial position as of March 31, 2004, and our results ofoperations and cash flows for the reported periods.  The results of operations for any interim period are notnecessarily indicative of the results to be expected for any other interimperiod or for the full fiscal year.  Theyear-end balance sheet data was derived from audited financial statements, butdoes not include all disclosures required by accounting principles generallyaccepted in the United States of America. Certain prior year amounts have been reclassified to conform with the2004 presentation.  These financialstatements should be read in conjunction with our audited consolidatedfinancial statements and related notes for the year ended December 31, 2003,which were included in our 2003 Annual Report on Form 10-K.

 

Note B.  Liquidity:

 

We had a working capital deficit of $118,000 as of March 31, 2004.  We partially fund our operations through ourAccounts Receivable Purchase Agreement with Silicon Valley Bank. This agreement expires on July 29, 2004.  However, both parties have the right to terminate this Agreementat any time.  A total of $482,000 was outstanding as of March 31, 2004.  SeeNote G for additional discussion.

 

In May 2004, we issued a$750,000, 12% convertible promissory note. The note is payable in interest onlythrough August 2004, and thereafter principal and interest is payable in equalmonthly installments over the next 15 months. We have the option to makeeach payment due under the note by using our common stock, at a 12% discount tothe average closing bid price of our common stock on the OTC Bulletin Board overthe previous thirty trading days.  Inconnection with the financing we paid a 3% origination fee, and issued a fiveyear warrant for the purchase of 1.34 million shares of our common stock at$0.28 per share.  In addition, we agreedto file a registration statement with the U.S. Securities and ExchangeCommission, covering the issuance or resale of the shares of the Company’scommon stock which may be issued in connection with the note and warrant issuedto the noteholder. 

 

Cash used inoperating activities was $636,000 for the three months ended March 31, 2004 andresulted primarily from an increase in accounts receivable.  Accounts receivable increased primarilybecause revenue increased in the first quarter of 2004 compared to the fourthquarter of 2003. 

 

Our ability to continue as a going concern depends upon our ability togenerate cash from operations, continue to access our borrowing facility withSilicon Valley Bank, and obtain any additional funding that may be needed.  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 discontinued ouroperations.

 

Note C.  Stockholders’ Equity:

 

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

 

6

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stock options granted to non-employeesis measured as the fair value of the option at the date of grant.  Such compensation costs, if any, areamortized on a straight-line basis over the underlying option vesting terms.

 

Nocompensation cost has been recognized for stock options granted to employees ordirectors under our 1989 Stock Option Plan, 1993 Equity Incentive Plan, 1993Directors Option Plan, 1997 Stock Option Plan, 1998 Non-Officers Plan, 1999Non-Officers Plan, 2000 Non-Officers Plan, or 2000 Non-Qualified Plan (collectivelyreferred to as the “Plans”).  Hadcompensation cost for the Plans been determined based on the fair value ofoptions at the grant date for awards in the three month periods ended March 31,2004 and 2003, our net income and net income per share would have changed tothe pro forma amounts indicated below: 

 

(In thousands, except pershare amounts)

 
|                                                                                                                                         |   | **Three  Months  Ended March 31,** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                                                                                         |   | **2004**                           |   | **2003** |   |
| Net income, as reported                                                                                                                      |   | $                                  | 774    |   | $ | 2,061 |   |
| Deduct total stock based employee  compensation expense determined under fair value based method for all awards,  net of related tax effects |   | (103                               | )      | (426 | ) |
| Pro forma net income                                                                                                                         |   | $                                  | 671    |   | $ | 1,635 |   |
|                                                                                                                                         |   |                               |   |   |   |
| Earnings per share:                                                                                                                          |   |                               |   |   |   |
| Basic - as reported                                                                                                                          |   | $                                  | 0.02   |   | $ | 0.05 |   |
| Basic - pro forma                                                                                                                            |   | $                                  | 0.02   |   | $ | 0.04 |   |
|                                                                                                                                         |   |                               |   |   |   |
| Diluted - as reported                                                                                                                        |   | $                                  | 0.02   |   | $ | 0.05 |   |
| Diluted - pro forma                                                                                                                          |   | $                                  | 0.02   |   | $ | 0.04 |   |

 

7

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Note D. Selected Balance SheetInformation:

 
| **(in  thousands)**                             |   | **March 31,  2004** |   | **December  31, 2003** |   |
|-------------------------------------------------|--------|---------------------|--------|------------------------|--------|
|                                            |   |                |   |                   |   |
| Accounts receivable, net:                       |   |                |   |                   |   |
| Accounts receivable                             |   | $                   | 1,190  |                   | $      | 742 |   |
| Less allowance for doubtful accounts            |   | (104                | )      | (124                   | )      |
| Totals                                          |   | $                   | 1,086  |                   | $      | 618 |   |
|                                            |   |                |   |                   |   |
| Property and equipment, net:                    |   |                |   |                   |   |
| Computer equipment                              |   | $                   | 828    |                   | $      | 828 |   |
| Furniture and equipment                         |   | 293                 |   | 293                    |   |
| Leasehold improvements                          |   | 60                  |   | 60                     |   |
| Totals                                          |   | 1,181               |   | 1,181                  |   |
| Less accumulated depreciation and  amortization |   | (910                | )      | (855                   | )      |
| Totals                                          |   | $                   | 271    |                   | $      | 326 |   |

 

Note E.  Net Income Per Share:

 

Basic incomeper share is computed based on the weighted average number of common sharesoutstanding.  Diluted income per shareis computed based onthe weighted average number of common shares outstanding adjusted by the numberof additional shares that would have been outstanding had the potentiallydilutive common shares been issued. Potentially dilutive shares of common stock include options and warrantsto purchase our common stock at prices at or below the average market price forour common stock as of the last date of the time period being measured.  The following is a reconciliation from basicearnings per share to diluted earnings per share:

 

(In thousands,except per share data)

 
|                                 |   | **Three  months ended  March 31,** |   |
|--------------------------------------|--------|------------------------------------|--------|
|                                 |   | **2004**                           |   | **2003** |   |
| Net income                           |   | $                                  | 774    |   | $ | 2,061 |   |
| Weighted Average Shares Outstanding: |   |                               |   |   |   |
| Basic                                |   | 38,892                             |   | 38,823 |   |
| Effect of Dilution - Stock Options   |   | 20                                 |   | 702 |   |
| Diluted                              |   | 38,912                             |   | 39,525 |   |
| Earning Per Share:                   |   |                               |   |   |   |
| Basic                                |   | $                                  | 0.02   |   | $ | 0.05 |   |
| Diluted                              |   | $                                  | 0.02   |   | $ | 0.05 |   |

 

The calculation of weightedaverage diluted shares outstanding excludes options and warrants forapproximately 5.4 million common shares at March 31, 2004 that wereanti-dilutive, as the exercise prices of those options and warrants weregreater than the average market price. 

 

Note F.  Recent Accounting Standards:

 

In January2003 the Financial Accounting Standards Board issued and, subsequently revised,Financial Interpretation No.46, “Consolidation of Variable Interest Entities”(“FIN 46”). FIN 46 requires a variable interest entity to be consolidated by acompany if that company is subject to a majority of the risk of loss from thevariable interest entity’s activities or entitled to receive a majority of theentity’s residual returns or both. This Interpretation applies to all VariableInterest Entities. Adoption was required for public companies at the end of

 

8

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periods ending after March 15,2004. The adoption of FIN 46 did not have an effect on our financial positionand results of operations.

 

NoteG.   Accounts Receivable Purchase Agreement:

 

We partiallyfund our operations through an Accounts Receivable Purchase Agreement withSilicon Valley Bank.  This agreemententitles us to borrow up to a maximum of $2.0 million based on 80% of 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.  The AccountsReceivable Purchase Agreement expires on July 29, 2004.  However, both parties have the right toterminate this agreement at any time. If Silicon Valley Bank decides not to purchase receivables from us, ourability to fund our operations could be materially harmed.  The amount outstanding under this AccountsReceivable Purchase Agreement was $482,000 as of March 31, 2004.

 

NoteH.   Sales of Investments:

 

In 2003, wesold portions of our equity holdings in NextNet Wireless, Inc to privateinvestors.  Several members of our boardand management team are and have been either directors, officers or consultantsat NextNet.  Our chairman, Joseph B.Costello, was also the chairman of NextNet. Another of our directors, DixonDoll, was also a director and a shareholder of NextNet.  Additionally, another director of Zamba,Sven Wehrwein, provided consulting services to NextNet, and Michael Carrel, ourCFO, was also the CFO for NextNet from October 1, 2003 through March 31, 2004. 

 

In the fourthquarter of 2003, we entered into stock purchase agreements with eleven privateinvestors, in which we sold an aggregate of 495,333 shares of NextNet Series APreferred Stock for an aggregate consideration of $743,000.  All of the shares were sold at a per shareprice of $1.50.  We recorded a deferredgain on sale of investment when we received the cash from these transactions inthe fourth quarter of 2003, and recorded a gain on sale of investment of$743,000 in the first quarter of 2004, when the shares were transferred to theprivate investors. 

 

On January 27,2003, we entered into an agreement to pay a third party $165,000 and transfer16,667 shares of NextNet Series A Preferred Stock to the third party’s familytrust in exchange for cancellation of a debt obligation under which we owedapproximately $434,000 in principal and accrued interest.  As a result, we recorded an extraordinarygain on debt extinguishment of approximately $198,000 and a gain on sale ofNextNet shares of $71,000 in the first quarter of 2003.   

 

On February17, 2003, we sold 177,306 shares of NextNet Series A Preferred Stock to twoprivate investors for $750,000.  Werecorded a deferred gain on sale of investment in the first quarter of 2003when we received the cash from these transactions, and a gain on sale ofinvestment was recorded in the second quarter of 2003, when the share transferwas completed.  

 

On November 5,2002, we entered into a loan agreement with Entrx Corporation, under whichEntrx agreed to lend us up to $2.5 million in three separate advances.  We received the first advance of $1 millionon November 4, 2002.  On February19, 2003, this loan agreement was amended. In connection with the amendment, we received the second advance of$750,000 during the first quarter of 2003, but waived our right to receive thethird advance.  On March 31, 2003, all principal and accruedinterest totaling $1.76 million was, pursuant to the loan agreement, convertedinto 415,340 shares of NextNet Wireless Series A Preferred Stock. Theconversion price was $4.23 per share, which was the per share price (ona common share equivalent basis, without giving effect to differences in rightsor to anti-dilution provisions or any other purchase price adjustments setforth in the NextNet loan agreement) that NextNet agreed to receive for a saleof other preferred stock.

 

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

 

9

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During thefirst quarter of 2004, NextNet was acquired by a privately-held communicationsindustry company.  Our NextNet shareswere converted into warrants to purchase up to 59,113 shares of common stock ofthe acquirer.  We may exercise thewarrants in all or in part through the earliest of March 16, 2010, or certaindefined “Liquidity Events”, which include a change of control or a publicoffering of the acquirer’s shares. 

 

Note I. Income Taxes:

 

We have notrecorded any current or deferred income tax provision for any of the periodspresented since we have a net operating loss carryforward.  Because of the uncertainty about whether wewill have taxable earnings in the future, we have not reflected any benefit ofsuch net operating loss carryforwards in the accompanying consolidatedfinancial statements.  At March 31,2004, we had approximately $85 million of net operating loss carryforwardsremaining, which begin to expire in 2005. The use of these carryforwards in any one year may be limited underInternal Revenue Code Section 382 due to significant ownership changes.  

 

Note J. Legal Matters:

 

We are subjectto various legal proceedings and claims that arise in the ordinary course ofbusiness that we do not believe are material either separately or in theaggregate.  

 

Note K.       MajorCustomers and Related Party Information:

 

A portion ofour revenues have been derived from significant customers for the three monthperiods ended March 31, 2004 and 2003 as follows: 

 
|                |   | **Three  Months  Ended March 31,** |   |
|---------------------|--------|------------------------------------|--------|
|                |   | **2004**                           |   | **2003** |   |
| Customer 1          |   | 23                                 | %      | 0 | % |
| Customer 2          |   | 18                                 | %      | 28 | % |
| Customer 3          |   | 17                                 | %      | 6 | % |
| Customer 4 - think3 |   | 13                                 | %      | 0 | % |
| Customer 5          |   | 11                                 | %      | 18 | % |
| Customer 6          |   | 2                                  | %      | 13 | % |

 

A portion of our revenue has been derived from related parties.   During the first quarter of 2004, $274,000was from think3, which represented 13% of our total revenue.  Our chairman, Joseph B.Costello, is also the chairman of think3. Also, $9,000 of our revenue for the three months ended March 31, 2004was derived from NextNet.  See Note Hfor additional disclosures related to NextNet.

 

**Item2****.  Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

**Overview**

 

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

 

10

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Our revenuesand earnings historically have fluctuated from quarter-to-quarter based on thenumber, size, and scope of projects in which we are engaged, the contractualterms and degree of completion of such projects, any delays incurred inconnection with a project, the adequacy of provisions for losses, the accuracyof estimates of resources required to complete ongoing projects, generaleconomic conditions, and other factors. Consequently, the results of operations described in this report may notbe indicative of results to be achieved in future periods.  In addition, revenues from a large clientmay constitute a significant portion of our total revenues in any particularquarter.

 

Our operatingresults for the quarters ended March 31, 2004 and 2003 were adversely affectedby rate pressures caused by the increase in customer usage of offshoredevelopers.  Many companies continue todelay decisions on information technology consulting projects, or havecancelled the projects altogether.  The industry continues to be challenged asglobal economic and political conditions cause companies to be cautious aboutincreasing their use of consulting services even as the demand for outsourcingcontinues to increase.

 

We also continue toexperience pricing pressures from competitors, as well as from clientsexperiencing pressures to control costs. In addition, the growing use of offshore resources to provide lower-costservice delivery capabilities within our industry continues to be a source ofpressure on our revenues and operating margins.  Our utilization of our personnel, which is calculated as thepercentage of the available working hours for which our consultants areperforming billable services, was strong during the first quarter of 2004,albeit based on a reduced headcount.

 

The primarycategories of operating expenses include cost of services, sales and marketing,and general and administrative costs. Cost of services is primarily driven bythe cost of client-service personnel, which consists mainly of compensation,sub-contractor and other personnel costs, and non-payroll outsourcing costs.Cost of services as a percentage of revenues is driven by the relatively highlabor costs in the marketplace for the type of highly skilled consultants weemploy and the rate of utilization of our client-service workforces. Sales and marketing expense is drivenprimarily by business-development activities; the development of new serviceofferings; the level of concentration of clients in a particular industry ormarket; and client-targeting, image-development and brand-recognitionactivities. General and administrative costs primarily include costs for officepersonnel, information systems and office space.  We seek to manage our general and administrative costs at levelsconsistent with changes in activity levels in our business, but many of thesecosts are fixed and we are generally not able to reduce them quickly, if atall, if our business activity is reduced.

 

Our costmanagement strategy continues to be to anticipate changes in demand for ourservices and to identify cost management initiatives. We aggressively plan andmanage our payroll costs to meet the anticipated demand for our servicesbecause our operating expenses can be significantly affected by variablecompensation costs.

 

 

**Resultsof Operations**

 

**Three months ended March 31, 2004, comparedto the three months ended March 31, 2003**

 

*Net Revenues*

Revenuesdecreased approximately 15% to $2.35 million in the first quarter of 2004compared to $2.77 million in the first quarter of 2003.  Revenues before reimbursements decreasedapproximately 14% to $2.16 million in the first quarter of 2004 compared to$2.51 million in the first quarter of 2003. The decrease was due primarily to a decrease in billable hours in thefirst quarter of 2004 as compared to the first quarter of 2003.  

 

*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$1.23 million or approximately 52% of net revenues in the first quarter of 2004compared to $1.44 million or approximately 52% of net revenues in the firstquarter of 2003.  The decrease inproject costs in dollar terms between these periods was due primarily to thedecrease in our headcount.

 

11

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*Reimbursable Expenses*

Reimbursable expenses consist of out-of-pocket expenses incurred whileproviding services that are reimbursed by our clients.  Reimbursable expenses were $186,000 orapproximately 8% of net revenues in the first quarter of 2004 compared to$264,000 or approximately 10% of net revenues in the first quarter of2003.  The decrease in reimbursableexpenses between these periods was primarily caused because we performed alower percentage of our billable work at client sites in the first quarter of2004 compared to the first quarter of 2003.

 

*Sales and Marketing Costs*

Sales andmarketing costs consist primarily of salaries, employee benefits and travelexpenses of sales and marketing personnel, as well as promotional costs.  Sales and marketing expenses were $197,000or approximately 8% of net revenues in the first quarter of 2004, compared to$249,000 or approximately 9% of net revenues in the first quarter of 2003.  The decrease between these periods wasprimarily due to a reduced headcount.

 

*General and Administrative Costs*

General andadministrative costs consist primarily of expenses associated with ourmanagement, information technology, occupancy costs, and finance andadministrative groups.  General andadministrative expenses were $679,000 or approximately 29% of net revenues inthe first quarter of 2004, compared to $782,000 or approximately 28% of netrevenues in the first quarter of 2003. A key factor in the decrease in general and administrative costs was dueto a reduced headcount.  

 

*Income Taxes*

Because we areuncertain as to whether we will have taxable earnings in the future, we havenot reflected any benefit of additional net operating loss carryforwards in theaccompanying unaudited consolidated financial statements.  The use of these carryforwards in any oneyear may be limited under Internal Revenue Code Section 382 due to significantownership changes.

 

*Net Income*

Our net incomefor the quarter ended March 31, 2004 was $774,000, or $0.02 per share, comparedto a net income for the quarter ended March 31, 2003 of $2.06 million, or $0.05per share.  Our income from operations,which does not include the gain on sale of NextNet shares, interest income andinterest expense, was $54,000 for the quarter ended March 31, 2004, compared toan income from operations of $37,000 for the quarter ended March 31, 2003.

 

**Critical Accounting Policies**

 

We haveidentified the policies below as critical to our business operations and the understandingof our results of operations.  Theimpact and any associated risks to these policies on our business, financialcondition and results of operations is discussed throughout Management’sDiscussion and Analysis of Financial Condition and Results of Operations wherethese policies affect our reported financial results.  Our preparation of this Form 10-Q requires us to make estimatesand assumptions that affect the reported amount of assets and liabilities, disclosureof 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.

 

Our critical accounting policies are as follows:

•                  Revenue Recognition;

•                  Allowance for Doubtful Accounts; and

•                  Investment in NextNet Wireless, Inc.

 

For a detaileddiscussion of the application of these and other accounting policies, see Note1 of the notes to the consolidated financial statements in our 2003 AnnualReport on Form 10-K.

 

12

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**Liquidityand Capital Resources**

 

At March 31,2004, we had approximately $109,000 in cash and cash equivalents, compared to$699,000 at December 31, 2003. As of March 31, 2004, we had no significantcapital spending or purchase commitments. We had a working capital deficitof $118,000 as of March 31, 2004.

 

Cash used inoperating activities was $636,000 for the three months ended March 31, 2004 andresulted primarily from an increase in accounts receivable.  Accounts receivable increased primarilybecause revenue increased in the first quarter of 2004 compared to the fourthquarter of 2003.  For the three monthsended March 31, 2003, cash used in operating activities was $967,000, whichresulted primarily from an increase in accounts receivable of $637,000, adecrease in accrued expenses of $637,000, and a decrease in accounts payable of$448,000, which were partially offset by a decrease in unbilled receivables of$330,000 and a decrease in prepaid expenses and other current assets of$280,000.  

 

There was nocash flow from investing activities during the three months ended March 31,2004.  For the three months ended March31, 2003, cash provided from investing activities was $753,000, which resultedprimarily from proceeds from the sale of a portion of our NextNet shares.  

 

Cash providedby financing activities was $46,000 for the three months ended March 31, 2004and consisted primarily of an increase in borrowings under our accountsreceivable purchase agreement with Silicon Valley Bank.  For the three months ended March 31, 2003,cash provided by financing activities was $626,000, which consisted primarilyof proceeds of a short-term loan from Entrx Corporation.  This loan was subsequently converted into asale of NextNet shares.  See Note H forfurther discussion regarding this loan.

 

Future payments due under debt and leaseobligations as of March 31, 2004, are as follows (in thousands):

 
|                                  |   | **Payments  due by period** |   |
|---------------------------------------|--------|-----------------------------|--------|
| **Contractual  Obligations**          |   | **Total**                   |   | **Less than  1 Year** |   | **1-3 Years** |   | **3-5 Years** |   | **More than  5 Years** |   |
| Accounts Receivable Puchase Agreement |   | $                           | 482    |   | $ | 482 |   | $ | — |   | $ | — |   | $ | — |   |
| Operating Leases                      |   | 837                         |   | 414 |   | 419 |   | 4 |   | — |   |
| Total                                 |   | $                           | 1,319  |   | $ | 896 |   | $ | 419 |   | $ | 4 |   | $ | — |   |

 

To fundoperations, we have an Accounts Receivable Purchase Agreement with SiliconValley Bank. This agreement entitles us to borrow up to a maximum of $2.0million based on 80% of eligible receivables, and is secured by virtually allof our assets.  Borrowings under thisagreement bear interest at a monthly rate of 1% of the average daily balanceoutstanding 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. This agreement expires on July 29, 2004.  However, both parties have the right to terminate this Agreementat any time.  The amount outstandingunder this agreement was $482,000 at March 31, 2004.

 

In May 2004, we issued a$750,000, 12% convertible promissory note. The note is payable in interest onlythrough August 2004, and thereafter principal and interest is payable in equalmonthly installments over the next 15 months. We have the option to makeeach payment due under the note by using our common stock, at a 12% discount tothe average closing bid price of our common stock on the OTC Bulletin Boardover the previous thirty trading days. In connection with the financing we paid a 3% origination fee, andissued a five year warrant for the purchase of 1.34 million shares of ourcommon stock at $0.28 per share.  Inaddition, we agreed to file a registration statement with the U.S. Securities andExchange Commission, covering the issuance or resale of the shares of theCompany’s common stock which may be issued in connection with the note andwarrant issued to the noteholder. 

 

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We believethat our existing cash and cash equivalents, together with proceeds received inMay 2004, from the convertible promissory note as described above, cashprovided from operations, and our borrowings from the Accounts ReceivablePurchase Agreement with Silicon Valley Bank, should be sufficient to meet ourworking capital and capital expenditure requirements through at least December31, 2004.  However, this estimateis based in part on our good faith projections regarding revenue and the timingof collection of receivables.  There canbe no assurance that revenue or the timing of collection of receivables willoccur on the basis that we are projecting. Beyond that date, our ability to continue as a going concerndepends on our ability to achieve and sustain profitability and generatepositive cash flow from operations, continue to access borrowing with SiliconValley Bank, and obtain additional funding, if necessary.

 

We willcontinue to explore possibilities for additional financing, but we cannot becertain that additional financing will be available to us on favorable terms,if at all. If our financial performance adversely affects our ability to obtainfunds secured by our accounts receivable, and we are unable to obtainadditional financing, we may not be able to continue operations beyond December31, 2004.  

 

**RISK FACTORS**

 

ZambaCorporation desires to take advantage of the “safe harbor” provisions of thePrivate Securities Litigation Reform Act of 1995 and is filing this cautionarystatement in connection with the reform act. This Quarterly Report onForm 10-Q and any other written or oral statements made by or on ourbehalf may include forward-looking statements that reflect our current viewswith respect to future events and future financial performance. The words“believe,” “expect,” “anticipate,” “intend,” “estimate,” “forecast,” “project,”“could,” “may,” and the negatives of such words, and other similar expressionsidentify forward-looking statements.

 

We wish tocaution you that any forward-looking statements made by us or on our behalf aresubject to uncertainties and other factors that could cause such statements tobe wrong. Some of these uncertainties and other factors are listed under thecaption “Risk Factors” below.  Althoughwe have attempted to list comprehensively these important factors, we also wishto caution investors that other factors may prove to be important in the futurein affecting our operating results.  Newfactors emerge from time to time, and it is not possible for us to predict allof these factors, nor can we assess the impact each factor or combination offactors may have on our business.

 

You arefurther cautioned not to place undue reliance on those forward-lookingstatements because they speak only of our views as of the date the statementswere made. We undertake no obligation to publicly update or revise anyforward-looking statements, whether as a result of new information, futureevents or otherwise.

 

**If we do not grow our revenues enough toregain profitability, we will have to obtain additional financing to continueoperations. **

 

Although werecorded net income of $774,000 during the quarter ended March 31, 2004, ourincome includes a gain on sale of investment of $743,000.  If we had not realized this gain, our incomewould have only been $31,000.  Ourquarterly revenues decreased to $2.35 million from $2.77 million in the firstquarters of 2004 and 2003, respectively. As of March 31, 2004, we had only $109,000 in cash and $1.09 million inaccounts receivable.  If we are unableto increase our revenues significantly, we may need to raise additional capitalto offset our losses from operations. Without additional capital, we may not be able to meet our workingcapital and capital expenditure requirements beyond December 31, 2004.  There is no assurance that we will be ableto obtain any financing or that, if we are successful in finding financing, itwill be on favorable terms.

 

Over the pasttwo years, we have substantially funded our operations through private sales ofZamba common stock and shares of Series A Preferred Stock in NextNet Wireless,Inc., from which we have received approximately $10.1 million, but we do notexpect to raise any further material amounts from sales of thisinvestment.  We have also supported ouroperations by borrowing funds under our banking relationship with SiliconValley Bank, which, since July 29, 2002, has been in the form of an AccountsReceivable Purchase Agreement.  However,Silicon Valley Bank can terminate the agreement at any time or reject any orall of our requests for advances, which could cause us to be dependent upon thetimeliness of our collections from our clients.  

 

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If we areunable to increase our revenues, manage our growth and projects effectively, orobtain additional financing, we may realize a material adverse effect in thequality of our services and products, our ability to retain key personnel, andour business, financial condition and results of operations. 

 

**The market for our stock is subject to rulesand risks relating to low-priced stock.**

 

Our commonstock is currently listed for trading on the NASD Over-The-Counter BulletinBoard and is subject to the “penny stock rules” adopted pursuant to Section15(g) of the Securities Exchange Act of 1934, as amended.  In general, the penny stock rules apply tonon-Nasdaq or non-national stock exchange companies whose common stock tradesat less than $5.00 per share or which have tangible net worth of less than$5,000,000 ($2,000,000 if the company has been operating for three or moreyears).  Such rules require, among otherthings, that brokers who trade “penny stock” to persons other than “establishedcustomers” complete certain documentation, make suitability inquiries ofinvestors and provide investors with certain information concerning trading inthe security, including a risk disclosure document, quote information, broker’scommission information and rights and remedies available to investors in pennystocks.  Many brokers have decided notto trade “penny stock” because of the requirements of the penny stock rulesand, as a result, the number of broker-dealers willing to act as market makersin such securities is limited.  The“penny stock rules,” therefore, may have an adverse impact on the market forour common stock and may affect our ability to attract competitivefunding.  Further, because our stock iscurrently listed on the Over-The-Counter Bulletin Board, this means that, amongother things, our stock may be less liquid than stocks quoted on the Nasdaq.  As a result, investors in our common stockmay have less of an ability to sell stock holdings or receive accurate stockprice quotations.

 

**The loss of a significant client could impactour operations.**

 

We derive asubstantial part of our revenues from a small number of clients.  During the quarter ended March 31, 2004,five clients each comprised more than 10% of our revenues, our top five clientscomprised 82% of our revenues, and our top ten clients comprised 93% of ourrevenues.  The loss of one or more ofthese clients could materially adversely affect our business, financialcondition and results of operations.  Althoughthese large clients vary from time to time and our long-term revenues do notrely on any one client, our revenues could be negatively affected if we were tolose one of our top clients or if we were to fail to collect a large accountreceivable.

 

In addition, many of ourcontracts are short-term and our clients may be able to reduce or cancel ourservices without incurring any penalty. If our clients reduce or terminate ourservices, we would lose revenue and would have to reallocate our employees andour resources to other projects to attempt to minimize the effects of thatreduction or termination. Accordingly,terminations, including any termination by a major client, couldadversely impact our revenues. We believe the uncertain economic environmentincreases the probability that services may be reduced or canceled.

 

**If weestimate incorrectly the time required to complete our projects, we will losemoney on fixed-price contracts.**

 

A portion of our contractsare fixed-price contracts, rather than contracts in which the client pays us ona time-and-materials basis. We must estimate the number of hours and thematerials required before entering into a fixed-price contract. Our futuresuccess will depend on our ability to continue to set rates and fees accuratelyand to maintain targeted rates of employee utilization and project quality. Ifwe fail to accurately estimate the time and the resources required for aproject, any required increase in the time and resources to complete theproject could cause our profits to decline.

 

**Wemay be liable to our clients for damages caused by our services or by ourfailure to remedy system failures.**

 

Many of our projects involvetechnology applications or systems that are critical to the operations of ourclients’ businesses and handle very large volumes of transactions. If we failto perform our services correctly, we may be unable to deliver applications orsystems to our clients with the promised functionality or within the

 

15

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promised time frame, or to satisfy therequired service levels for support and maintenance. While we have takenprecautionary actions to create redundancy and back-up systems, any suchfailures by us could result in claims by our clients for substantial damagesagainst us. Although we attempt to limit the amount and type of our contractualliability for defects in the applications or systems we provide, and carryinsurance coverage, which mitigates this liability in certain instances, wecannot be assured that these limitations and insurance coverages will beapplicable and enforceable in all cases. Even if these limitations and insurancecoverages are found to be applicable and enforceable, our liability to ourclients for these types of claims could be material in amount and affect ourbusiness, financial condition and results of operations.

 

**Undermany of our contracts, the payment of some or all of our fees is conditionedupon our performance.**

 

Many clients require us toinclude in our contracts payment incentives related to factors such as costsincurred, benefits produced, goals attained and adherence to schedule.  In these contracts, payment of all or aportion of our fees is contingent upon our clientsmeeting revenue-enhancement, cost-saving orother contractually defined goals which are increasing in complexity and oftendependent in some measure on our clients’ actual levels of businessactivity.  The trend to include greaterincentives in our contracts related to additional revenues generated, costsincurred, benefits produced or our adherence to schedule may increase thevariability in revenues and margins earned on such contracts.

 

**We face difficulties growing our revenues.**

 

Ourutilization rates are measured by the percentage of hours billed by ourconsultants among all hours they are available to work on projects.  Over the past several quarters, ourutilization rates have been high, relative to historical norms, which meansthat we would need to increase our number of billable consultants or useadditional subcontractors if additional revenue opportunities were to becomeavailable.  There is no guaranteeadditional revenue opportunities will become available or that, if they were tobecome available, we would be able to retain consultants or subcontractors withthe appropriate skills to perform the services for those opportunities.  Further, we face continuous pressure fromseveral directions on the rates we charge our clients.  Many of our competitors, including largerconsulting firms with greater financial and personnel resources than we have,smaller consulting firms with lower cost structures, and large consulting firmsin offshore locations such as India and Romania that have access to pools oftechnical consultants at lower costs than consultants based in the UnitedStates, may be willing to provide the services we provide at a lowerincremental cost than what we charge. Any negative changes to our retention of consultants, utilization orbillable rates could materially adversely affect our business, financialcondition and results of operations.  

 

**Ourability to remain profitable will suffer if we are not able to maintain ourpricing and utilization rates and control our costs. A continuation of currentpricing pressures could result in permanent changes in pricing policies anddelivery capabilities.**

* *

Our profit margins arelargely a function of the rates we are able to recover for our services and theutilization rate, or chargeability, of our professionals. Accordingly, if weare not able to maintain the pricing for our services or an appropriateutilization rate for our professionals without corresponding cost reductions,our profit margin and our profitability will suffer. The rates we are able torecover for our services are affected by a number of factors, including:

 

•                  our clients’ perceptions of our ability toadd value through our services;

•                  competition;

•                  introduction of new services or products byus or our competitors;

•                  pricing policies of our competitors;

•                  our ability to accurately estimate, attainand sustain engagement revenues, margins and cash flows over increasinglylonger contract periods; and

•                  the use of globally sourced, lower-costservice delivery capabilities by our competitors and our clients.

 

Our utilization rates are also affected by anumber of factors, including:

 

•                  seasonal trends, primarily as a result of ourhiring cycle;

 

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•                  our ability to transition employees fromcompleted projects to new engagements;

•                  our ability to forecast demand for ourservices and thereby maintain an appropriate headcount in each of ourworkforces; and

•                  our ability to manage attrition.

 

**Wehave significant fixed operating costs, which may be difficult to adjust inresponse to unanticipated fluctuations in revenues.**

* *

A high percentage of ouroperating expenses, particularly personnel, rent and depreciation, are fixed inadvance of any particular quarter. As a result, an unanticipated decrease inthe number or average size of, or an unanticipated delay in the scheduling for,our projects may cause significant variations in operating results in anyparticular quarter and could have a material adverse effect on operations forthat quarter.

 

Anunanticipated termination or decrease in size or scope of a major project, aclient’s decision not to proceed with a project we anticipated or thecompletion during a quarter of several major client projects could require usto maintain underutilized employees and could have a material adverse effect onour business, financial condition and results of operations. Our revenues andearnings may also fluctuate from quarter to quarter because of such factors as:

 

•                  the contractual terms and timing ofcompletion of projects, including achievement of certain business results;

•                  any delays incurred in connection withprojects;

•                  the adequacy of provisions for losses and baddebts;

•                  the accuracy of our estimates of resourcesrequired to complete ongoing projects;

•                  loss of key highly skilled personnelnecessary to complete projects; and

•                  general economic conditions.

 

**Our future use of net operating losscarryforwards (NOL’s) may be limited.**

 

Our currentcash flow may be benefited by our substantial NOL’s, which can eliminate orreduce the federal and state income taxes on any future taxable income.  The NOL’s could be lost or significantlyreduced if there is a significant change in our major shareholders.

 

**We face additional risks that are incidentalto our business.**

 

•                  Our business maysuffer unless global economic conditions improve.

•                  The price of ourcommon stock could fluctuate significantly, which may result in losses for investors.

•                  Anti-takeovereffects of Delaware law, our Stockholder Rights Plan, and our change in controlseverance arrangements could prevent a change in control of our company.

 

**Item3****.  Quantitativeand Qualitative Disclosures About Market Risk**

 

We are notcurrently exposed to market risk from changes in security prices and interestrates. We do not invest in any derivative financial instruments. Excess cash isinvested in short-term low-risk vehicles, such as money market investments.Changes in interest rates are not expected to have a material adverse effect onour business, financial condition or results of operations.

 

**Item 4****.  Controls andProcedures**

 

Our principalexecutive officer and principal financial officer have evaluated theeffectiveness of the design and operation of our disclosure controls andprocedures as of the end of the period covered by this report (the “EvaluationDate”). Based on such evaluation, such officers have concluded that, as of theEvaluation Date, our disclosure controls and procedures were effective toensure that information required to be disclosed in the reports we file andsubmit under the Securities Exchange Act of 1934, as amended, is recorded,processed, summarized and reported within the time periods specified in theSecurities and Exchange Commission’s rules and forms.

 

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There has beenno change in our internal control over financial reporting during the periodcovered by this report that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

 

 

**PARTII****.  OTHER INFORMATION**

 

Item 1. Legal Proceedings

 

We are subjectto various legal proceedings and claims that arise in the ordinary course ofbusiness, which we do not believe to be material either separately or in theaggregate.

 

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.             OtherInformation

 

None.

 

Item 6.             Exhibitsand Reports on Form 8-K

 

(a)                                  Exhibits: 

 
| 10.01  |   | Secured Promissory Note  between Pandora Select Partners L.P. and Zamba Corporation, dated May 14,  2004                     |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                         |
| 10.02  |   | Warrant to  Purchase Shares of Common Stock issued by Zamba Corporation to Pandora Select  Partners L.P., dated May 14, 2004 |
|   |   |                                                                                                                         |
| 10.03  |   | Registration  Rights Agreement between Pandora Select Partners L.P. and Zamba Corporation,  dated May 14, 2004               |
|   |   |                                                                                                                         |
| 31.01  |   | Certification of Principal  Executive Officer pursuant to Exchange Act Rule 13a-14(a).                                       |
|   |   |                                                                                                                         |
| 31.02  |   | Certification of Principal  Financial Officer pursuant to Exchange Act Rule 13a-14(a).                                       |
|   |   |                                                                                                                         |
| 32     |   | Certifications pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.   |

 

(b)                                 Reports on Form 8-K:

 

None.

 

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SIGNATURES

 

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

 

 
|   | ZAMBA  CORPORATION   |
|--------|----------------------|
|   |                 |   |
|   | By:                  | /s/ Norm  Smith |
|   |                 | Norman D.  Smith |
|   |                 | President and Chief  Executive Officer |
|   |                 |   |
|   |                 |   |
|   | By:                  | /s/ Michael  H. Carrel |
|   |                 | Michael H.  Carrel |
|   |                 | Executive  Vice President and Chief Financial Officer |
|   |                 | (Principal  Financial and Accounting Officer) |
|   |                 |   |
|   | Dated: May  14, 2004 |

 

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