**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C.  20549**

 

**FORM 10-Q**

 

**(Mark One)**

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

 

**For the quarterly period ended June 30, 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.) |

 

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

(Address of principal executive offices, including zip code)

 

**(952) 832-9800**

(Registrant’s telephone number, including area code)

 

Indicate by check mark whetherthe Registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the Registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days.

 
| YES |   | ý |   | NO |   | o |
|-----|--------|--------|--------|----|--------|---|

 

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

 
| YES |   | o |   | NO |   | ý |
|-----|--------|---|--------|----|--------|--------|

 

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

 

| **Class**                     |   | **Outstanding at  August 6, 2004** |
|-------------------------------|--------|------------------------------------|
| Common Stock, $0.01 par value |   | 38,909,458                         |

 

 

----

 

ZAMBA CORPORATION

 

INDEX

 
| PART I — Financial Information |                                                                                        |
|-------------------------------------|---------------------------------------------------------------------------------------------|
|                                |                                                                                        |   |
| Item 1.                             | Financial Statements (Unaudited)                                                            |   |
|                                |                                                                                        |   |
|                                |                                                                                        | Consolidated Statements of Operations for  the Three and Six Months Ended June 30, 2004 and 2003 |   |
|                                |                                                                                        |   |   |
|                                |                                                                                        | Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003 |   |
|                                |                                                                                        |   |   |
|                                |                                                                                        | Consolidated Statements of Cash Flows for  the Six Months Ended June 30, 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.                             | Disclosure Controls and Procedures                                                          |   |
|                                |                                                                                        |   |
| PART II — Other Information    |                                                                                        |
|                                |                                                                                        |   |
| Item 1.                             | Legal Proceedings                                                                           |   |
|                                |                                                                                        |   |
| Item 2.                             | Changes in Securities and Use of  Proceeds                                                  |   |
|                                |                                                                                        |   |
| Item 3.                             | Defaults Upon  Senior Securities                                                            |   |
|                                |                                                                                        |   |
| Item  4.                            | Submission  of Matters to a Vote of Security Holders                                        |   |
|                                |                                                                                        |   |
| Item 5.                             | Other Information                                                                           |   |
|                                |                                                                                        |   |
| Item 6.                             | Exhibits and Reports on Form 8-K                                                            |   |
|                                |                                                                                        |
| Signatures                          |                                                                                        |
|                                     |                                                                                             |  |  |  |  |

 

2

----

 

**Part I.Financial Information**

 

**Item 1:Financial Statements**

 

**ZAMBA CORPORATION**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 

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

 
|                                                |   | **Three  months ended  June 30,** |       | **Six months  ended  June 30,** |       |
|-----------------------------------------------------|--------|-----------------------------------|------------|---------------------------------|------------|
|                                                |   | **2004**                          |       | **2003**                        |       | **2004** |   | **2003** |   |
| **Revenues:**                                       |   |                              | ** ** |                            | ** ** |   | ** ** |   | ** ** |
| **Professional services**                           |   | **$**                             | **1,602**  | ** **                      | **$**      | **2,601** | ** ** | **$** | **3,763** | ** ** | **$** | **5,111** | ** ** |
| **Reimbursable expenses**                           |   | **131**                           | ** ** | **253**                         | ** ** | **317** | ** ** | **517** | ** ** |
| **Total revenues**                                  |   | **1,733**                         | ** ** | **2,854**                       | ** ** | **4,080** | ** ** | **5,628** | ** ** |
|                                                |   |                              | ** ** |                            | ** ** |   | ** ** |   | ** ** |
| **Costs and expenses:**                             |   |                              | ** ** |                            | ** ** |   | ** ** |   | ** ** |
| **Project and personnel costs**                     |   | **1,169**                         | ** ** | **1,513**                       | ** ** | **2,400** | ** ** | **2,955** | ** ** |
| **Reimbursable expenses**                           |   | **131**                           | ** ** | **253**                         | ** ** | **317** | ** ** | **517** | ** ** |
| **Sales and marketing**                             |   | **171**                           | ** ** | **275**                         | ** ** | **368** | ** ** | **524** | ** ** |
| **General and administrative**                      |   | **677**                           | ** ** | **764**                         | ** ** | **1,356** | ** ** | **1,546** | ** ** |
| **Non-recurring items**                             |   | **129**                           | ** ** | **—**                      | ** ** | **129** | ** ** | **—** | ** ** |
| **Total costs and expenses**                        |   | **2,277**                         | ** ** | **2,805**                       | ** ** | **4,570** | ** ** | **5,542** | ** ** |
|                                                |   |                              | ** ** |                            | ** ** |   | ** ** |   | ** ** |
| **Income (loss) from operations**                   |   | **(544**                          | **)**      | **49**                          | ** ** | **(490** | **)** | **86** | ** ** |
|                                                |   |                              | ** ** |                            | ** ** |   | ** ** |   | ** ** |
| **Other income (expense):**                         |   |                              | ** ** |                            | ** ** |   | ** ** |   | ** ** |
| **Gain on sale of NextNet shares**                  |   | **—**                        | ** ** | **750**                         | ** ** | **743** | ** ** | **2,603** | ** ** |
| **Interest expense**                                |   | **(63**                           | **)**      | **(20**                         | **)**      | **(86** | **)** | **(47** | **)** |
| **Other income (expense), net**                     |   | **(63**                           | **)**      | **730**                         | ** ** | **657** | ** ** | **2,556** | ** ** |
|                                                |   |                              | ** ** |                            | ** ** |   | ** ** |   | ** ** |
| **Income (loss) before extraordinary item**         |   | **(607**                          | **)**      | **779**                         | ** ** | **167** | ** ** | **2,642** | ** ** |
|                                                |   |                              | ** ** |                            | ** ** |   | ** ** |   | ** ** |
| **Extraordinary gain from extinguishment of  debt** |   | **—**                        | ** ** | **—**                      | ** ** | **—** | ** ** | **198** | ** ** |
|                                                |   |                              | ** ** |                            | ** ** |   | ** ** |   | ** ** |
| **Net income (loss)**                               |   | **$**                             | **(607**   | **)**                           | **$**      | **779** | ** ** | **$** | **167** | ** ** | **$** | **2,840** | ** ** |
|                                                |   |                              | ** ** |                            | ** ** |   | ** ** |   | ** ** |
| **Basic and diluted net income (loss) per  share:** |   |                              | ** ** |                            | ** ** |   | ** ** |   | ** ** |
| **Income before extraordinary item**                |   | **$**                             | **(0.02**  | **)**                           | **$**      | **0.02** | ** ** | **$** | **0.00** | ** ** | **$** | **0.07** | ** ** |
| **Extraordinary gain from extinguishment of  debt** |   | **—**                        | ** ** | **—**                      | ** ** | **—** | ** ** | **—** | ** ** |
| **Basic and diluted net income (loss) per  share:** |   | **$**                             | **(0.02**  | **)**                           | **$**      | **0.02** | ** ** | **$** | **0.00** | ** ** | **$** | **0.07** | ** ** |
|                                                |   |                              | ** ** |                            | ** ** |   | ** ** |   | ** ** |
| **Weighted average shares outstanding:**            |   |                              | ** ** |                            | ** ** |   | ** ** |   | ** ** |
| **Basic**                                           |   | **38,901**                        | ** ** | **38,832**                      | ** ** | **38,896** | ** ** | **38,827** | ** ** |
| **Diluted**                                         |   | **38,901**                        | ** ** | **40,130**                      | ** ** | **38,920** | ** ** | **40,125** | ** ** |

 

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

 

3

----

 

**ZAMBACORPORATION**

**CONSOLIDATEDBALANCE SHEETS**

**(Unaudited)**

 

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

 
|                                                                                                                                                                 |   | **June 30,  2004** |       | **December  31,  2003** |       |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|------------|-------------------------|------------|
| **ASSETS**                                                                                                                                                           |   |               | ** ** |                    | ** ** |
| **Current assets:**                                                                                                                                                  |   |               | ** ** |                    | ** ** |
| **Cash and cash equivalents**                                                                                                                                        |   | **$**              | **344**    | ** **              | **$**      | **699** | ** ** |
| **Accounts receivable, net**                                                                                                                                         |   | **829**            | ** ** | **618**                 | ** ** |
| **Unbilled receivables**                                                                                                                                             |   | **79**             | ** ** | **79**                  | ** ** |
| **Prepaid expenses and other current assets**                                                                                                                        |   | **91**             | ** ** | **108**                 | ** ** |
| **Total current assets**                                                                                                                                             |   | **1,343**          | ** ** | **1,504**               | ** ** |
|                                                                                                                                                                 |   |               | ** ** |                    | ** ** |
| **Property and equipment, net**                                                                                                                                      |   | **185**            | ** ** | **326**                 | ** ** |
| **Other assets**                                                                                                                                                     |   | **56**             | ** ** | **57**                  | ** ** |
| **Total assets**                                                                                                                                                     |   | **$**              | **1,584**  | ** **              | **$**      | **1,887** | ** ** |
|                                                                                                                                                                 |   |               | ** ** |                    | ** ** |
| **LIABILITIES AND STOCKHOLDERS’ DEFICIT**                                                                                                                       |   |               | ** ** |                    | ** ** |
| **Liabilities:**                                                                                                                                                     |   |               | ** ** |                    | ** ** |
| **Current installments of long-term debt**                                                                                                                           |   | **$**              | **239**    | ** **              | **$**      | **—** | ** ** |
| **Line of credit**                                                                                                                                                   |   | **296**            | ** ** | **436**                 | ** ** |
| **Accounts payable**                                                                                                                                                 |   | **95**             | ** ** | **128**                 | ** ** |
| **Accrued expenses**                                                                                                                                                 |   | **831**            | ** ** | **919**                 | ** ** |
| **Deferred revenue**                                                                                                                                                 |   | **51**             | ** ** | **187**                 | ** ** |
| **Deferred gain on sale of investment**                                                                                                                              |   | **—**         | ** ** | **783**                 | ** ** |
| **Total current liabilities**                                                                                                                                        |   | **1,512**          | ** ** | **2,453**               | ** ** |
|                                                                                                                                                                 |   |               | ** ** |                    | ** ** |
| **Long-term debt, less current maturities**                                                                                                                          |   | **169**            | ** ** | **—**              | ** ** |
|                                                                                                                                                                 |   |               |       |                    |       |
| **Commitments and contingencies**                                                                                                                                    |   |               | ** ** |                    | ** ** |
|                                                                                                                                                                 |   |               |       |                    |       |
| **Stockholders’ deficit:**                                                                                                                                      |   |               | ** ** |                    | ** ** |
| **Common stock, $0.01 par value, 120,000 shares authorized, 38,909 and  38,892 shares issued and outstanding at June 30, 2004 and December 31, 2003,  respectively** |   | **389**            | ** ** | **389**                 | ** ** |
| **Additional paid-in capital**                                                                                                                                       |   | **86,382**         | ** ** | **86,080**              | ** ** |
| **Accumulated deficit**                                                                                                                                              |   | **(86,868**        | **)**      | **(87,035**             | **)**      |
| **Total stockholders’ deficit**                                                                                                                                 |   | **(97**            | **)**      | **(566**                | **)**      |
|                                                                                                                                                                 |   |               | ** ** |                    | ** ** |
| **Total liabilities and stockholders’ deficit**                                                                                                                 |   | **$**              | **1,584**  | ** **              | **$**      | **1,887** | ** ** |

 

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

 

4

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* *

**ZAMBACORPORATION**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
|                                                                               |   | **Six months  ended  June 30,** |       |
|------------------------------------------------------------------------------------|--------|---------------------------------|------------|
| **(In thousands)**                                                                 |   | **2004**                        |       | **2003** | ** ** |
|                                                                               |   |                            | ** ** |   | ** ** |
| **Cash flows from operating activities:**                                          |   |                            | ** ** |   | ** ** |
| **Net income**                                                                     |   | **$**                           | **167**    | ** ** | **$** | **2,840** | ** ** |
| **Adjustments to reconcile net income to net cash used in operating  activities:** |   |                            | ** ** |   | ** ** |
| **Depreciation, amortization and non-cash charges**                                |   | **136**                         | ** ** | **160** | ** ** |
| **Provision for bad debts**                                                        |   | **(20**                         | **)**      | **—** | ** ** |
| **Gain on disposal of fixed assets**                                               |   | **37**                          | ** ** | **(7** | **)** |
| **Gain on sale of NextNet shares**                                                 |   | **(743**                        | **)**      | **(2,603** | **)** |
| **Extraordinary gain on extinguishment of debt**                                   |   | **—**                      | ** ** | **(198** | **)** |
| **Changes in operating assets and liabilities:**                                   |   |                            | ** ** |   | ** ** |
| **Accounts receivable**                                                            |   | **(191**                        | **)**      | **(1,125** | **)** |
| **Unbilled receivables**                                                           |   | **1**                           | ** ** | **84** | ** ** |
| **Prepaid expenses and other assets**                                              |   | **(53**                         | **)**      | **266** | ** ** |
| **Accounts payable**                                                               |   | **(33**                         | **)**      | **(413** | **)** |
| **Accrued expenses and other long-term liabilities**                               |   | **(129**                        | **)**      | **(1,180** | **)** |
| **Deferred revenue**                                                               |   | **(136**                        | **)**      | **93** | ** ** |
| **Net cash used in operating activities**                                          |   | **(964**                        | **)**      | **(2,083** | **)** |
|                                                                               |   |                            | ** ** |   | ** ** |
| **Cash flows from investing activities:**                                          |   |                            | ** ** |   | ** ** |
| **Purchase of property and equipment**                                             |   | **(3**                          | **)**      | **(41** | **)** |
| **Proceeds from sale of NextNet shares**                                           |   | **—**                      | ** ** | **750** | ** ** |
| **Proceeds from sale of equipment**                                                |   | **—**                      | ** ** | **9** | ** ** |
| **Net cash provided by (used in) investing activities**                            |   | **(3**                          | **)**      | **718** | ** ** |
|                                                                               |   |                            | ** ** |   | ** ** |
| **Cash flows from financing activities:**                                          |   |                            | ** ** |   | ** ** |
| **Line of credit, net**                                                            |   | **(140**                        | **)**      | **577** | ** ** |
| **Proceeds from short-term loan**                                                  |   | **—**                      | ** ** | **750** | ** ** |
| **Proceeds from note payable**                                                     |   | **750**                         | ** ** | **—** | ** ** |
| **Proceeds from sale of common stock**                                             |   | **2**                           | ** ** | **3** | ** ** |
| **Payments of long-term debt**                                                     |   | **—**                      | ** ** | **(169** | **)** |
| **Net cash provided by financing activities**                                      |   | **612**                         | ** ** | **1,161** | ** ** |
|                                                                               |   |                            | ** ** |   | ** ** |
| **Net decrease in cash and cash equivalents**                                      |   | **(355**                        | **)**      | **(204** | **)** |
| **Cash and cash equivalents, beginning of period**                                 |   | **699**                         | ** ** | **549** | ** ** |
| **Cash and cash equivalents, end of period**                                       |   | **$**                           | **344**    | ** ** | **$** | **345** | ** ** |
|                                                                               |   |                            | ** ** |   | ** ** |
| **Supplemental Schedule for Disclosures of Cash Flow Information:**                |   |                            | ** ** |   | ** ** |
|                                                                               |   |                            | ** ** |   | ** ** |
| **Cash paid during the period for interest**                                       |   | **$**                           | **55**     | ** ** | **$** | **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 partof the consolidated financial statements.**

 

5

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ZAMBA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note A.  Basis of Presentation:

 

The unauditedconsolidated financial statements of Zamba Corporation as of June 30, 2004, andfor the three and six month periods ended June 30, 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 June 30, 2004, and our results of operationsand cash flows for the reported periods. The results of operations for any interim period are not necessarilyindicative of the results to be expected for any other interim period or forthe full fiscal year.  The year-endbalance sheet data was derived from audited financial statements, but does notinclude all disclosures required by accounting principles generally accepted inthe United States of America.  Certainprior year amounts have been reclassified to conform with the 2004presentation.  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 $169,000 and a stockholders’deficit of $97,000 as of June 30, 2004. We partially fund our operations through our AccountsReceivable Purchase Agreement withSilicon Valley Bank.  Thisagreement expires on July 29, 2005. However, both parties have the right to terminate this Agreement at anytime.  A total of $296,000 was outstanding as of June 30, 2004.  SeeNote H for additional discussion.

 

In May 2004, we issued a$750,000, 12% promissory note. The note is payable in interest only throughAugust 2004, and thereafter principal and interest is payable in equal monthlyinstallments over the next 15 months. We have the option, subject to certainlimitations, to make each payment due under the note by using our common stock,at a 12% discount to the average closing bid price of our common stock on theOTC Bulletin Board over the previous thirty trading days.  The number of shares issued to pay a particularmonthly payment may not exceed 10% of the aggregate number of shares traded forthe 30 days preceding the day such monthly payment is due. Also, the number ofshares beneficially owned by the payee must be less than 4.99% of ouroutstanding common stock and the aggregate number of shares issued cannotexceed 10,000,000.  In connection withthe financing, we issued a five-year warrant for the purchase of 1.34 millionshares of our common stock at $0.28 per share. In addition, we agreed to file a registration statement with the U.S.Securities and Exchange Commission, covering the issuance or resale of theshares of the Company’s common stock which may be issued in connection with thenote and warrant issued to the noteholder. See Note G for additional discussion.

 

Cash used inoperating activities was $964,000 for the six months ended June 30, 2004 andresulted primarily from a loss from operations of $490,000, as well as anincrease in accounts receivable of $191,000, a decrease in deferred revenue of$136,000 and a decrease in accrued liabilities of $129,000. 

 

Ourability to continue as a going concern depends upon our ability to generatecash from operations, continue to access our borrowing facility with SiliconValley 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 chosen to accountfor stock-based compensation using the intrinsic value method prescribed inAccounting Principles Board Opinion No. 25, “Accounting for Stock Issued toEmployees,” and related

 

6

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interpretations(APB No. 25).  We account forstock-based compensation to non-employees using the fair value methodprescribed by Statements of Financial Accounting Standards (SFAS) No. 123.  Accordingly, compensation costs for stockoptions granted to employees are measured as the excess, if any, of the valueof our stock at the date of the grant over the amount an employee must pay toacquire the stock.  Compensation costfor stock options granted to non-employees is measured as the fair value of theoption at the date of grant.  Suchcompensation costs, if any, are amortized on a straight-line basis over theunderlying option vesting terms.

 

No compensation cost has been recognized forstock options granted to employees or directors under our 1989 Stock OptionPlan, 1993 Equity Incentive Plan, 1993 Directors Option Plan, 1997 Stock OptionPlan, 1998 Non-Officers Plan, 1999 Non-Officers Plan, 2000 Non-Officers Plan,or 2000 Non-Qualified Plan (collectively referred to as the “Plans”).  Had compensation cost for the Plans beendetermined based on the fair value of options at the grant date for awards inthe three and six month periods ended June 30, 2004 and 2003, our net incomeand net income per share would have changed to the pro forma amounts indicatedbelow: 

 

(In thousands, except per share amounts)

 
|                                                                                                                                         |   | **Three  Months  Ended June 30,** |   | **Six Months  Ended June 30,** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|--------------------------------|--------|
|                                                                                                                                         |   | **2004**                          |   | **2003**                       |   | **2004** |   | **2003** |   |
|                                                                                                                                         |   |                              |   |                           |   |   |   |   |   |
| Net income (loss), as reported                                                                                                               |   | $                                 | (607   | )                              | $      | 779 |   | $ | 167 |   | $ | 2,840 |   |
| Deduct total stock based employee  compensation expense determined under fair value based method for all awards,  net of related tax effects |   | (82                               | )      | (308                           | )      | (185 | ) | (734 | ) |
|                                                                                                                                         |   |                              |   |                           |   |   |   |   |   |
| Pro forma net income (loss)                                                                                                                  |   | $                                 | (689   | )                              | $      | 471 |   | $ | (18 | ) | $ | 2,106 |   |
|                                                                                                                                         |   |                              |   |                           |   |   |   |   |   |
| Earnings per share:                                                                                                                          |   |                              |   |                           |   |   |   |   |   |
| Basic - as reported                                                                                                                          |   | $                                 | (0.02  | )                              | $      | 0.02 |   | $ | 0.00 |   | $ | 0.07 |   |
| Basic - pro forma                                                                                                                            |   | $                                 | (0.02  | )                              | $      | 0.01 |   | $ | 0.00 |   | $ | 0.05 |   |
|                                                                                                                                         |   |                              |   |                           |   |   |   |   |   |
| Diluted - as reported                                                                                                                        |   | $                                 | (0.02  | )                              | $      | 0.02 |   | $ | 0.00 |   | $ | 0.07 |   |
| Diluted - pro forma                                                                                                                          |   | $                                 | (0.02  | )                              | $      | 0.01 |   | $ | 0.00 |   | $ | 0.05 |   |

 

7

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Note D. Selected Balance Sheet Information:

 
| **(in thousands)**                              |   | **June 30,  2004** |   | **December  31, 2003** |   |
|-------------------------------------------------|--------|--------------------|--------|------------------------|--------|
|                                            |   |               |   |                   |   |
| Accounts receivable, net:                       |   |               |   |                   |   |
| Accounts receivable                             |   | $                  | 933    |                   | $      | 742 |   |
| Less allowance for doubtful accounts            |   | (104               | )      | (124                   | )      |
| Totals                                          |   | $                  | 829    |                   | $      | 618 |   |
|                                            |   |               |   |                   |   |
| Property and equipment, net:                    |   |               |   |                   |   |
| Computer equipment                              |   | $                  | 301    |                   | $      | 828 |   |
| Furniture and equipment                         |   | 146                |   | 293                    |   |
| Leasehold improvements                          |   | 60                 |   | 60                     |   |
| Totals                                          |   | 507                |   | 1,181                  |   |
| Less accumulated depreciation and  amortization |   | (322               | )      | (855                   | )      |
| Totals                                          |   | $                  | 185    |                   | $      | 326 |   |

 

Note E.  Net Income Per Share:

 

Basic income per share is computed based on theweighted average number of common shares outstanding.  Diluted income per share is computed based on the weightedaverage number of common shares outstanding adjusted by the number ofadditional shares that would have been outstanding had the potentially dilutivecommon shares been issued.  Potentiallydilutive shares of common stock include options and warrants to purchase ourcommon stock at prices at or below the average market price for our common stockas of the last date of the time period being measured.  The following is a reconciliation from basicearnings per share to diluted earnings per share:

 
|                                      |   | **Three  months ended  June 30,** |   | **Six months  ended  June 30,** |   |
|-------------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
| **(In thousands, except per share data)** |   | **2004**                          |   | **2003**                        |   | **2004** |   | **2003** |   |
| Net income (loss)                         |   | $                                 | (607   | )                               | $      | 779 |   | $ | 167 |   | $ | 2,840 |   |
| Weighted Average Shares Outstanding:      |   |                              |   |                            |   |   |   |   |   |
| Basic                                     |   | 38,901                            |   | 38,832                          |   | 38,896 |   | 38,827 |   |
| Effect of Dilution - Stock Options        |   | —                            |   | 1,298                           |   | 24 |   | 1,298 |   |
| Diluted                                   |   | 38,901                            |   | 40,130                          |   | 38,920 |   | 40,125 |   |
| Earning Per Share:                        |   |                              |   |                            |   |   |   |   |   |
| Basic                                     |   | $                                 | (0.02  | )                               | $      | 0.02 |   | $ | 0.00 |   | $ | 0.07 |   |
| Diluted                                   |   | $                                 | (0.02  | )                               | $      | 0.02 |   | $ | 0.00 |   | $ | 0.07 |   |

 

The calculation of weightedaverage diluted shares outstanding excludes options and warrants forapproximately 10.0 million common shares at June 30, 2004 that wereanti-dilutive, as the exercise prices of those options and warrants weregreater than the average market price. 

 

Note F.  RecentAccounting Standards:

 

In January 2003 theFinancial 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 the

 

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variable interest entity’s activities or entitled toreceive a majority of the entity’s residual returns or both. ThisInterpretation applies to all variable interest entities. Adoption was requiredfor public companies at the end of periods ending after March 15, 2004. Theadoption of FIN 46 did not have an effect on our financial position and resultsof operations.

 

Note G.   Note Payable

 

In May 2004, we issued a$750,000, 12% promissory note. The note is payable in interest only throughAugust 2004, and thereafter principal and interest is payable in equal monthlyinstallments over the next 15 months. We have the option, subject tocertain limitations, to make each payment due under the note by using ourcommon stock, at a 12% discount to the average closing bid price of our commonstock on the OTC Bulletin Board over the previous thirty trading days.  The number of shares issued to pay aparticular monthly payment may not exceed 10% of the aggregate number of sharestraded for the 30 days preceding the day such monthly payment is due. Also, thenumber of shares beneficially owned by the payee must be less than 4.99% of ouroutstanding common stock and the aggregate number of shares issued cannotexceed 10,000,000.  In connection withthe financing, we issued a five-year warrant for the purchase of 1.34 millionshares of our common stock at $0.28 per share. In addition, we agreed to file a registration statement with the U.S.Securities and Exchange Commission, covering the issuance or resale of theshares of the Company’s common stock which may be issued in connection with thenote and warrant issued to the noteholder. 

 

The proceeds of the loanwere allocated between the note and the fair value of the warrants using theBlack-Scholes pricing model.  The fairvalue of the warrants was $295,000, based on a $0.28 exercise price per share,$0.25 market price per share, risk free interest rate of 3.96%, volatility of136% and an expected term of five years. The fair value of the warrants is being amortized over the 18-month termof the note payable.  

 

An additional debtextinguishments cost may arise at the time of payment in common stock if theclosing price of our common stock on the day of conversion is higher than theactual conversion price.  This expensewould be recorded in the period of conversion. 

 

The note payable balanceis recorded as follows as of June 30, 2004 (in thousands):

 
| Note payable                              |   | $      | 750    |   |
|-------------------------------------------|--------|--------|--------|--------|
| Warrant charge, net of amortization       |   | (271   | )      |
| Financing fees, net of amortization       |   | (71    | )      |
| Note payable, net                         |   | $      | 408    |   |
|                                      |   |   |   |
| Recorded on the balance sheet as follows: |   |   |   |
|                                      |   |   |   |
| Current installments of long-term debt    |   | $      | 239    |   |
| Long-term debt, less current maturities   |   | 169    |   |
| Total                                     |   | $      | 408    |   |

 

Note H.   Accounts Receivable Purchase Agreement:

 

We partially fund ouroperations through an Accounts Receivable Purchase Agreement with SiliconValley Bank.  This agreement entitles usto borrow up to a maximum of $2.0 million based on 80% of eligible receivables,and is secured 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.  The Accounts ReceivablePurchase Agreement expires on July 29, 2005. However, both parties have the right to terminate this agreement at anytime.  If Silicon Valley Bank decidesnot to purchase receivables from us, our ability to fund our operations couldbe materially harmed.  The amountoutstanding under this Accounts Receivable Purchase Agreement was $296,000 asof June 30, 2004.

 

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Note I.   Sales of Investments:

 

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 in thefirst quarter of 2004, when the shares were transferred to the privateinvestors.  Several members of our boardand management team are, or have been, directors, officers or consultants atNextNet.  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. 

 

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 set forthin the NextNet loan agreement) that NextNet agreed to receive for a sale ofother 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.

 

*Duringthe first quarter of 2004, NextNet was acquired by a privately-heldcommunications industry company.  OurNextNet shares were converted into warrants to purchase up to 59,113 shares ofcommon stock of the acquirer.  We mayexercise the warrants in all or in part through the earliest of March 16, 2010,or certain defined “Liquidity Events”, which include a change of control or apublic offering of the acquirer’s shares.*

 

Note J. 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 June 30, 2004,we had approximately $85 million of net operating loss carryforwards remaining,which begin to expire in 2005.  The useof these carryforwards in any one year may be limited under Internal RevenueCode Section 302 due to significant ownership changes.  

 

Note K. Legal Matters:

 

We are subject to various legal proceedingsand claims that arise in the ordinary course of business that we do not believeare material either separately or in the aggregate.

 

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Note L.   MajorCustomers and Related Party Information:

 

A portion ofour revenues have been derived from significant customers for the three and sixmonth periods ended June 30, 2004 and 2003 as follows: 

 
|                |   | **Three  Months  Ended June 30,** |   | **Six Months  Ended June 30,** |   |
|---------------------|--------|-----------------------------------|--------|--------------------------------|--------|
|                |   | **2004**                          |   | **2003**                       |   | **2004** |   | **2003** |   |
|                |   |                              |   |                           |   |   |   |   |   |
| Customer 1          |   | 30                                | %      | 14                             | %      | 23 | % | 21 | % |
| Customer 2          |   | 20                                | %      | 10                             | %      | 15 | % | 14 | % |
| Customer 3          |   | 13                                | %      | 0                              | %      | 6 | % | 0 | % |
| Customer 4 - think3 |   | 12                                | %      | 0                              | %      | 12 | % | 0 | % |
| Customer 5          |   | 9                                 | %      | 12                             | %      | 14 | % | 9 | % |
| Customer 6          |   | 7                                 | %      | 24                             | %      | 12 | % | 12 | % |

 

A portion of our revenue has been derived from related parties.   During the three and six months ended June30, 2004, $189,000 and $463,000, respectively, was from think3, which represented12% of our total revenue for each period. Our chairman, Joseph B. Costello, is also the chairman ofthink3.  Also, $22,000 and $31,000 ofour revenue for the three and six months ended June 30, 2004, respectively, wasderived from NextNet.  See Note I foradditional disclosures related to NextNet.

 

Note M.  Subsequent Event:

 

On August 6,2004, we signed a definitive merger agreement with Technology Solutions Company(TSC) under which we will be acquired by TSC.  TSC is a consulting company that delivers business benefitsthrough the application of information technology.  TSC is a publicly traded company on NASDAQunder the symbol “TSCC”.  Under theagreement, TSC will offer each Zamba common shareholder 0.15 share ofTSC common stock for each share of Zamba common stock.  The merger is subject to shareholderapproval.

 

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

 

**Overview**

** **

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

 

Our 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 in connectionwith a project, the adequacy of provisions for losses, the accuracy ofestimates of resources required to complete ongoing projects, general economicconditions, 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 three and six months ended June 30, 2004 and 2003 wereadversely affected by rate pressures caused by the increase in customer usageof offshore developers.  Many companiescontinue to delay decisions on information technology consulting projects, orhave cancelled the projects

 

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altogether.  The industry continues to be challenged as global economic and politicalconditions cause companies to be cautious about increasing their use ofconsulting services even as the demand for outsourcing continues 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 and second quartersof 2004, albeit based on a reduced headcount.

 

The primary categories of operating expensesinclude cost of services, sales and marketing, and general and administrativecosts. Cost of services is primarily driven by the cost of client-servicepersonnel, which consists mainly of compensation, sub-contractor and otherpersonnel costs, and non-payroll outsourcing costs. Cost of services as apercentage of revenues is driven by the relatively high labor costs in themarketplace for the type of highly skilled consultants we employ and the rateof utilization of our client-service workforces. Sales and marketing expense is drivenprimarily by business-development activities; the development of new service offerings;the level of concentration of clients in a particular industry or market; andclient-targeting, image-development and brand-recognition activities. Generaland administrative costs primarily include costs for office personnel,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 cost management strategy continues to be to anticipate changes indemand for our services and to identify cost management initiatives. Weaggressively plan and manage our payroll costs to meet the anticipated demandfor our services because our operating expenses can be significantly affectedby variable compensation costs.

 

**Resultsof Operations**

** **

**Three months ended June 30, 2004, compared tothe three months ended June 30, 2003**

 

*Net Revenues*

 

Revenues decreasedapproximately 39% to $1.73 million in the second quarter of 2004 compared to$2.85 million in the second quarter of 2003. Revenues before reimbursements decreased approximately 38% to $1.60million in the second quarter of 2004 compared to $2.60 million in the second quarterof 2003.  The decrease was due primarilyto a decrease in billable hours and average rate in the second quarter of 2004as compared to the second 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$1.17 million or approximately 67% of net revenues in the second quarter of2004 compared to $1.51 million or approximately 53% of net revenues in thesecond quarter of 2003.  The decrease inproject costs in dollar terms between these periods was due primarily to thedecrease in our headcount.

 

*Reimbursable Expenses*

 

Reimbursable expenses consist of out-of-pocket expenses incurred whileproviding services that are reimbursed by our clients.  Reimbursable expenses were $131,000 orapproximately 8% of net revenues in the second quarter of 2004 compared to$253,000 or approximately 9% of net revenues in the second 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 second quarter of2004 compared to the second quarter of 2003.

 

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*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 $171,000or approximately 10% of net revenues in the second quarter of 2004, compared to$275,000 or approximately 10% of net revenues in the second quarter of 2003.  The decrease between these periods was primarilydue 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 $677,000 or approximately 39% of net revenues inthe second quarter of 2004, compared to $764,000 or approximately 27% of netrevenues in the second quarter of 2003. A key factor in the decrease in general and administrative costs was dueto a reduced headcount.

 

*Non-recurring Items*

 

Non-recurringitems consist primarily of severance, equipment write-offs and leasecharges.  Non-recurring expenses were$129,000 or approximately 7% of net revenues in the second quarter of 2004,compared to $0 in the second quarter of 2003.

 

*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 302 due to significantownership changes.

 

*Net Income (Loss)*

 

Our net lossfor the quarter ended June 30, 2004 was $607,000, or $0.02 per share, comparedto a net income for the quarter ended June 30, 2003 of $779,000, or $0.02 pershare.  Our loss from operations, whichdoes not include the gain on sale of NextNet shares, interest income andinterest expense, was $544,000 for the quarter ended June 30, 2004, compared toan income from operations of $49,000 for the quarter ended June 30, 2003.

 

**Six months ended June 30, 2004, compared tothe six months ended June 30, 2003**

 

*Net Revenues*

 

Revenues decreasedapproximately 28% to $4.08 million for the six months ended June 30, 2004compared to $5.63 million for the six months ended June 30, 2003.  Revenues before reimbursements decreasedapproximately 26% to $3.76 million for the six months ended June 30, 2004compared to $5.11 million for the six months ended June 30, 2003.  The decrease was due primarily to a decreasein billable hours and average rate for the six months ended June 30, 2004 ascompared to the six months ended June 30, 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$2.40 million or approximately 59% of net revenues for the six months endedJune 30, 2004 compared to $2.96 million or approximately 53% of net revenuesfor the six months ended June 30, 2003. The decrease in project costs in dollar terms between these periods wasdue primarily to the decrease in our headcount.

 

*Reimbursable Expenses*

 

Reimbursable expenses consist of out-of-pocket expenses incurred whileproviding services that are reimbursed by our clients.  Reimbursable expenses were $317,000 orapproximately 8% of net revenues for the six months ended June 30, 2004compared to $517,000 or approximately 9% of net revenues for the six monthsended June 30, 2003.  The decrease inreimbursable expenses between these periods was primarily caused because weperformed a lower percentage of our billable work at client sites for the sixmonths ended June 30, 2004 compared to the six months ended June 30, 2003.

 

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*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 $368,000or approximately 9% of net revenues for the six months ended June 30, 2004,compared to $524,000 or approximately 9% of net revenues for the six monthsended June 30, 2003.  The decreasebetween these periods was primarily 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 $1.36 million or approximately 33% of net revenuesfor the six months ended June 30, 2004, compared to $1.55 million orapproximately 27% of net revenues for the six months ended June 30, 2003.  A key factor in the decrease in general andadministrative costs was due to a reduced headcount.

 

*Non-recurring Items*

 

Non-recurringitems consist primarily of severance, equipment write-offs and leasecharges.  Non-recurring expenses were$129,000 or approximately 3% of net revenues for the six months ended June 30,2004, compared to $0 for the six months ended June 30, 2003.

 

*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 302 due to significantownership changes.

 

*Net Income*

 

Our net incomefor the six months ended June 30, 2004 was $167,000, or less than $0.01 pershare, compared to a net income for the six months ended June 30, 2003 of $2.84million, or $0.07 per share.  Our lossfrom operations, which does not include the gain on sale of NextNet shares,interest income and interest expense, was $490,000 for the six months endedJune 30, 2004, compared to an income from operations of $86,000 for the sixmonths ended June 30, 2003.

 

**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, financial conditionand results of operations is discussed throughout Management’s Discussion andAnalysis of Financial Condition and Results of Operations where these policiesaffect our reported 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.

 

Our critical accounting policies are as follows:

 

•                  Revenue Recognition;

•                  Allowance for Doubtful Accounts; and

•                  Investment in NextNet Wireless, Inc.

 

For a detailed discussion ofthe application of these and other accounting policies, see Note 1 of the notesto the consolidated financial statements in our 2003 Annual Report on Form10-K.

 

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***Liquidity and Capital Resources***

* *

At June 30, 2004, we hadapproximately $344,000 in cash and cash equivalents, compared to $699,000 atDecember 31, 2003. As of June 30, 2004, we had no significant capital spendingor purchase commitments.  We had a working capital deficit of $169,000and a stockholders’ deficit of $97,000 as of June 30, 2004.

 

Cash used in operatingactivities was $964,000 for the six months ended June 30, 2004 and resultedprimarily from our loss from operations of $490,000, as well as an increase inaccounts receivable of $191,000, a decrease in accrued expenses of $129,000 anda decrease in deferred revenue of $136,000. For the six months ended June 30, 2003, cash used in operating activitieswas $2.08 million, which resulted primarily from an increase in accountsreceivable of $1.13 million, and a decrease in accrued expenses of $1.18million.

 

Cash used in investingactivities was $3,000 during the six months ended June 30, 2004, and resultedfrom the purchase of property and equipment. For the six months ended June 30, 2003, cash provided from investingactivities was $718,000, which resulted primarily from proceeds from the saleof a portion of our NextNet shares.

 

Cash provided byfinancing activities was $612,000 for the six months ended June 30, 2004 andconsisted primarily of proceeds of a note payable.  For the six months ended June 30, 2003, cash provided byfinancing activities was $1.16 million, which consisted primarily of anincrease in the line of credit and proceeds of a short-term loan from EntrxCorporation.  This loan was subsequentlyconverted into a sale of NextNet shares. See Note H for further discussion regarding this loan.

 

Futurepayments due under debt and lease obligations as of June 30, 2004, are asfollows (in thousands):

 
|                                  |   | **Payments  due by period** |   |
|---------------------------------------|--------|-----------------------------|--------|
| **Contractual Obligations**           |   | **Total**                   |   | **Less than1 Year** |   | **1-3 Years** |   | **3-5 Years** |   | **More than5 Years** |   |
| Accounts Receivable Puchase Agreement |   | $                           | 296    |   | $ | 296 |   | $ | — |   | $ | — |   | $ | — |   |
| Note Payable                          |   | 750                         |   | 487 |   | 263 |   | — |   | — |   |
| Operating Leases                      |   | 691                         |   | 268 |   | 419 |   | 4 |   | — |   |
| Total                                 |   | $                           | 1,737  |   | $ | 1,051 |   | $ | 682 |   | $ | 4 |   | $ | — |   |

 

To fund operations, wehave an Accounts Receivable Purchase Agreement with Silicon Valley Bank. Thisagreement entitles us to borrow up to a maximum of $2.0 million based on 80% ofeligible receivables, 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.  This agreementexpires on July 29, 2005.  However, bothparties have the right to terminate this Agreement at any time.  The amount outstanding under this agreementwas $296,000 at June 30, 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, subjectto certain limitations, to make each payment due under the note by using ourcommon stock, at a 12% discount to the average closing bid price of our commonstock on the OTC Bulletin Board over the previous thirty trading days.  The number of shares issued to pay aparticular monthly payment may not exceed 10% of the aggregate number of sharestraded for the 30 days preceding the day such monthly payment is due. Also, thenumber of shares beneficially owned by the payee must be less than 4.99% of ouroutstanding common stock and the aggregate number of shares issued cannotexceed 10,000,000.  In connection with thefinancing, we issued a five-year warrant for the purchase of 1.34 millionshares of our common stock at $0.28 per share. In addition, we agreed to file a registration statement with the U.S.Securities and Exchange Commission, covering the issuance or resale of theshares of the Company’s common stock which may be issued in connection with thenote and warrant 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 any forward-lookingstatements, whether as a result of new information, future events or otherwise.

 

**If we donot grow our revenues enough to regain profitability, we will have to obtainadditional financing to continue operations.**

 

Our net loss inthe second quarter of 2004 was $607,000. Our quarterly revenues decreased to $1.73 million from $2.85 million inthe second quarters of 2004 and 2003, respectively.  As of June 30, 2004, we had only $344,000 in cash and $829,000 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 past twoyears, 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 are unableto increase our revenues, manage our growth and projects effectively, or obtainadditional financing, we may realize a material adverse effect in the qualityof our services and products, our ability to retain key personnel, and ourbusiness, 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 theNasdaq.  As a result, investors in ourcommon stock may have less of an ability to sell stock holdings or receiveaccurate stock price quotations.

 

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

 

We derive a substantial part of our revenuesfrom a small number of clients.  Duringthe quarter ended June 30, 2004, four clients each comprised more than 10% ofour revenues, our top five clients comprised 85% of our revenues, and our topten clients comprised 98% of our revenues. The loss of one or more of these clients could materially adverselyaffect our business, financial condition and results of operations.  Although these large clients vary from timeto time and our long-term revenues do not rely on any one client, our revenuescould be negatively affected if we were to lose one of our top clients or if wewere to fail to collect a large account receivable.

 

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

 

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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 andinsurance coverages are found to be applicable and enforceable, our liabilityto our clients for these types of claims could be material in amount and affectour business, 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 most of 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 forinvestors.

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

 

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

 

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

 

**Item4.  Controls and Procedures**

 

Our principal executiveofficer and principal financial officer have evaluated the effectiveness of thedesign and operation of our disclosure controls and procedures as of the end ofthe period covered by this report (the “Evaluation Date”). Based on suchevaluation, such officers have concluded that, as of the Evaluation Date, ourdisclosure controls and procedures were effective to ensure that informationrequired to be disclosed in the reports we file and submit under the SecuritiesExchange Act of 1934, as amended, is recorded, processed, summarized andreported within the time periods specified in the Securities and ExchangeCommission’s rules and forms.

 

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There has been no change inour internal control over financial reporting during the period covered by thisreport that has materially affected, or is reasonably likely to materiallyaffect, 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

 

On May 13, 2004, weissued a $750,000, 12% promissory note. The note is payable in interest only throughAugust 2004, and thereafter principal and interest is payable in equal monthlyinstallments over the next 15 months. We have the option, subject tocertain limitations, to make each payment due under the note by using ourcommon stock, at a 12% discount to the average closing bid price of our commonstock on the OTC Bulletin Board over the previous thirty trading days.  The number of shares issued to pay aparticular monthly payment may not exceed 10% of the aggregate number of sharestraded for the 30 days preceding the day such monthly payment is due. Also, thenumber of shares beneficially owned by the payee must be less than 4.99% of ouroutstanding common stock and the aggregate number of shares issued cannotexceed 10,000,000.  In connection withthe financing, we issued a five-year warrant for the purchase of 1.34 millionshares of our common stock at $0.28 per share. In addition, we agreed to file a registration statement with the U.S.Securities and Exchange Commission, covering the issuance or resale of theshares of the Company’s common stock which may be issued in connection with thenote and warrant issued to the noteholder. Because the transaction did not involve a public offering, the shares ofour common stock were deemed to be issued pursuant to an exemption fromregistration provided by Section 4(2) of the Securities Act of 1933, asamended.  Proceeds from the transactionwill be used for operations.

 

Item 3.    Defaults Upon Senior Securities

 

None.

 

Item 4.    Submission of Matters to a Vote of Security Holders

 

None.

 

Item 5.    Other Information

 

On August 6,2004, we signed a definitive merger agreement with Technology Solutions Company(TSC) under which we will be acquired by TSC.  TSC is a consulting company that delivers business benefitsthrough the application of information technology.  TSC is a publicly traded company on NASDAQunder the symbol “TSCC”.  Under theagreement, TSC will offer each Zamba common shareholder 0.15 share ofTSC common stock for each share of Zamba common stock.  The merger is subject to shareholderapproval.

 

Item 6.    Exhibits and Reports on Form 8-K

 

(a)                                  Exhibits:

 

31.01                     Certification of Principal Executive Officerpursuant to Exchange Act Rule 13a-14(a).

 

31.02                     Certification of Principal Financial Officerpursuant to Exchange Act Rule 13a-14(a).

 

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32                                    Certifications pursuant to 18 U.S.C. Section1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

(b)                                 Reportson Form 8-K:

 

On May 17, 2004, we filed a report on Form 8-K, whichcontained a copy of our press release announcing we had raised $750,000 in aprivate placement of debt and that we also issued to the investor a warrant topurchase up 1,339,286 shares of common stock at an exercise price of $0.28 pershare.

 

On May 17, 2004, we filed areport on Form 8-K, which contained a copy of our press release announcing ourfinancial results for the three-month period ended March 31, 2004.

 

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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/ Michael  H. Carrel |   |
|   |                    | Michael H. Carrel |
|   |                    | President and Chief Executive Officer |
|   |                    |   |
|   | By:                     | /s/ Michael  H. Carrel |   |
|   |                    | Michael H.  Carrel |
|   |                    | Chief  Financial Officer |
|   |                    | (Principal  Financial and Accounting Officer) |
|   |                    |   |
|   | Dated:  August 13, 2004 |

 

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