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0001104659-01-501247.txt : 20010810 0001104659-01-501247.hdr.sgml : 20010810 ACCESSION NUMBER: 0001104659-01-501247 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010809 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ZAMBA CORP CENTRAL INDEX KEY: 0000883741 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING, DATA PROCESSING, ETC. [7370] IRS NUMBER: 411636021 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-22718 FILM NUMBER: 1702014 BUSINESS ADDRESS: STREET 1: 7301 OHMS LANE STE 200 CITY: MINNEAPOLIS STATE: MN ZIP: 55439 BUSINESS PHONE: 6128329800 MAIL ADDRESS: STREET 1: 7301 OHMS LANE STREET 2: STE 200 CITY: MINNEAPOLIS STATE: MN ZIP: 55439 FORMER COMPANY: FORMER CONFORMED NAME: RACOTEK INC DATE OF NAME CHANGE: 19931025 10-Q 1 j1311_10q.htm 10-Q Prepared by MerrillDirect

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, 2001
	OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from _____ to _____

Commission File Number 0-22718

ZAMBA CORPORATION
(Exact name of Registrant as specified in its charter)

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

3033 Excelsior Boulevard, Suite 200, Minneapolis, Minnesota 55416
(Address of principal executive offices, including zip code)
(952) 832-9800
(Registrant's telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

	Outstanding at
Class	August 1, 2001

Common Stock, $0.01 par value	34,709,883

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, 2001 and 2000

	Consolidated Balance Sheets as of June 30, 2001 and December 31, 2000

	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2001 and 2000

	Notes to Consolidated Financial Statements

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations

Item 3.	Quantitative and Qualitative Disclosures About Market Risk

PART II — Other Information

Item 1.	Legal Proceedings

Item 2.	Changes in Securities

Item 3.	Defaults Upon Senior Securities

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

Item 5.	Other Information

Item 6.	Exhibits and Reports on Form 8-K

Signatures

PART I. FINANCIAL INFORMATION

Item 1: Financial Statements

ZAMBA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

(In thousands, except per share data)

For the three months ended June 30,

For the six months ended June 30,

2001

2000

2001

2000

Net revenues

8,020

9,715

19,830

17,932

Costs and expenses:

Project and personnel costs

5,688

4,775

11,768

9,090

Sales and marketing

1,292

1,133

3,185

2,188

General and administrative

4,043

3,363

8,900

6,130

Restructuring charges

2,188

Amortization of intangibles and non-cash compensation

1,008

168

2,025

Total costs and expenses

13,287

10,279

26,209

19,433

Loss from operations

(5,267

)

(564

)

(6,379

)

(1,501

)

Other income (expense):

Interest income

131

Interest expense

(55

)

(16

)

(79

)

(39

)

(19

)

Net loss

(5,286

)

(523

)

(6,368

)

(1,409

)

Net loss per share - basic and diluted

(0.16

)

(0.02

)

(0.20

)

(0.04

)

Weighted average shares outstanding - basic and diluted

32,340

31,490

32,258

31,398

The accompanying notes are an integral part of the consolidated financial statements.

ZAMBA CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)

(In thousands, except per share data)

			June 30,			December 31,
			2001			2000

ASSETS
Current assets:
	Cash and cash equivalents		$	4,925		$	4,843
	Accounts receivable, net		3,067			5,858
	Unbilled receivables		483			426
	Notes receivable, net		1,377			1,979
	Notes receivable - related parties		338			359
	Prepaid expenses and other current assets		845			660

		Total current assets	11,035			14,125

Property and equipment, net			1,931			1,650
Restricted cash			471			264
Intangible assets, net			156			231
Other assets			290			243

		Total assets	$	13,883		$	16,513

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
	Line of credit		$	2,000		$	0
	Current installments of long-term debt		443			607
	Accounts payable		944			1,589
	Accrued expenses		4,218			3,306
	Deferred revenue		925			1,480

		Total current liabilities	8,530			6,982

Long-term debt, less current installments			333			469

Commitments
		Total liabilities	8,863			7,451


Stockholders' equity:
	Common stock, $0.01 par value, 120,000 shares authorized, 34,710 and 32,164 shares issued and outstanding at June 30, 2001 and December 31, 2000, respectively		347			322
	Additional paid-in capital		84,177			81,876
	Note receivable from director		(500		)	(500		)
	Accumulated deficit		(79,004		)	(72,636		)

		Total stockholders' equity	5,020			9,062

		Total liabilities and stockholders' equity	$	13,883		$	16,513

The accompanying notes are an integral part of the consolidated financial statements.

ZAMBA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)


(In thousands)					Six Months Ended June 30,

					2001			2000

Cash flows from operating activities:
	Net loss				$	(6,368	)	$	(1,409	)
	Adjustments to reconcile net loss to net cash used in operating activities:
		Depreciation and amortization			420			2,482
		Provision for bad debts			641			324
		Changes in operating assets and liabilities:
			Accounts receivable		2,596			(2,399		)
			Unbilled receivables		(57		)	(223		)
			Notes receivable		156			-
			Prepaid expenses and other assets		(232		)	(538		)
			Accounts payable		(645		)	575
			Accrued expenses		912			(1,427		)
			Deferred revenue		(555		)	568

				Net cash used in operating activities	(3,132		)	(2,047		)

Cash flows from investing activities:
	Purchase of property and equipment				(534		)	(535		)
	Restricted cash				(207		)	110
	Notes receivable - related parties				21			(754		)

				Net cash used in investing activities	(720		)	(1,179		)

Cash flows from financing activities:
	Line of credit, net				2,000			-
	Proceeds from sale of common stock				2,211			-
	Proceeds from exercises of stock options				23			647
	Payments of long-term debt				(300		)	(282		)

				Net cash provided by financing activities	3,934			365


Net increase (decrease) in cash and cash equivalents					82			(2,861		)
Cash and cash equivalents, beginning of period					4,843			7,973

Cash and cash equivalents, end of period					$	4,925		$	5,112

Supplemental Schedule of Disclosures of Cash Flow Information:

	Cash paid during the period for interest				$	64		$	41

The accompanying notes are an integral part of the consolidated financial statements.

ZAMBA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note A. Basis of Presentation:

The unaudited consolidated financial statements of ZAMBA Corporation as of June 30, 2001, and for the three and six month periods ended June 30, 2001 and 2000, reflect all adjustments (which include only normal recurring adjustments) necessary, in the opinion of management, to fairly state our financial position as of June 30, 2001, and our results of operations and cash flows for the reported periods. The results of operations for any interim period are not necessarily indicative of the results to be expected for any other interim period or for the full fiscal year. The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. Certain prior year amounts have been reclassified to conform with the 2001 presentation. These financial statements should be read in conjunction with our audited consolidated financial statements and related notes for the year ended December 31, 2000, which were included in our 2000 Report on Form 10-K.

Note B. Selected Balance Sheet Information:

(in thousands)		June 30, 2001			December 31, 2000

Accounts receivable, net:
	Accounts receivable	$	3,268		$	6,287
	Less allowance for doubtful accounts	(201		)	(429		)

		$	3,067		$	5,858


Notes receivable, net:
	Notes receivable	$	1,823		$	1,979
	Less allowance for doubtful accounts	(446		)	-

		$	1,377		$	1,979


Property and equipment, net:
	Computer equipment	$	1,594		$	1,406
	Furniture and equipment	642			694
	Leasehold improvements	1,201			931

		3,437			3,031
	Less accumulated depreciation and amortization	(1,506		)	(1,381		)

		$	1,931		$	1,650

Note C. Net Loss Per Share:

We incurred net losses for the three and six month periods ended June 30, 2001 and 2000. The calculation of diluted net loss per common share does not include approximately 300,000 potential shares of common stock equivalents as their inclusion would be anti-dilutive.

Note D. Recent Accounting Standards:

In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141 “Business Combinations,” and SFAS No. 142 “Goodwill and Other Intangible Assets,” which change the accounting for business combinations and goodwill. SFAS No. 141 requires that the purchase method of accounting be used for business combinations initiated after June 30, 2001. Use of the pooling-of-interests method will be prohibited. SFAS No. 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Amortization of goodwill, including goodwill recorded in past business combinations, will therefore cease upon adoption of the Statement, which for the Company will be January 1, 2002. The Company is currently evaluating SFAS No. 141 and SFAS No. 142, but does not expect that they will have a material effect on its financial statements.

The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard No. 133 “Accounting for Derivative Instruments and Hedging Activities” (SFAS) No. 133, as amended by SFAS No. 138. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. SFAS No. 133 requires companies to recognize all derivatives as either assets or liabilities, and measure those instruments at fair value. The statement is effective beginning after January 1, 2001. We have implemented SFAS No. 133, as amended, in fiscal year 2001. The implementation of this statement did not have an impact on our financial position, results of operations or cash flows for the three or six months ended June 30, 2001.

Note E. Restructuring Charges

In the second quarter of 2001, Zamba recorded restructuring charges of $2.19 million, consisting of $900,000 for headcount reductions, $1.20 million for consolidation of facilities and related fixed assets, and $90,000 of other related restructuring charges. These charges were taken to align our cost structure with changing market conditions, due principally to a reduction in the demand for information technology consulting services, related to a general slowdown in the economy. The plan resulted in headcount reduction of approximately 90 employees, which was made up of approximately 67% professional services staff and 33% non-billable staff. The facilities charges were due to office closures in Pleasanton and Carlsbad, California, and St. Paul, Minnesota.

As of the end of the second quarter of 2001, $778,000 of cash was used for restructuring charges, and the remaining $1.41 million cash outlay is expected to occur over the next year.

Restructuring activities as of June 30, 2001 were as follows:

	Severance		Facilities
	and Benefits		and Other


Provision in second quarter 2001	$	900,000	$	1,288,000
Amount utilized in second quarter 2001	$	530,000	$	248,000

Balance remaining at June 30, 2001	$	370,000	$	1,040,000

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

ZAMBA Corporation is a leading customer relationship management (CRM) consulting and systems integration company for Global 2000 organizations. We help clients better anticipate, understand and respond to the needs of their current and potential customers through integrated, multi-channel solutions. Based on our CRM expertise and experience, we have created an end-to-end blueprint of industry-leading solutions addressing each aspect of CRM, including strategy, marketing and analytics, commerce and content, contact center, mobile and wireless, sales, customer experience and support. We also own approximately 33% of the equity in NextNet Wireless, Inc., a private corporation engaged in the development of wireless data products targeted at wireless DSL. Our vice chairman, Joseph B. Costello, is also the chairman of NextNet Wireless, Inc.

We currently derive most of our revenues from systems integration services, including business case evaluation, system planning and design, software package implementation, custom software development, training, installation and change management.

Our revenues and earnings may fluctuate from quarter-to-quarter based on the number, size and scope of projects in which we are engaged, the contractual terms and degree of completion of such projects, any delays incurred in connection with a project, the adequacy of provisions for losses, the accuracy of estimates of resources required to complete ongoing projects, and general economic conditions and other factors. Consequently, the results of operations described in this report may not be indicative of results to be achieved in future periods. In addition, revenues from a large client may constitute a significant portion of our total revenues in any particular quarter.

Results of Operations

Three months ended June 30, 2001, compared to the three months ended June 30, 2000

Net Revenues
Net revenues decreased 17% to $8.02 million in 2001 compared to $9.72 million in 2000. The decrease was due principally to a significant reduction in the demand for information technology consulting services, due to a general slowdown in the economy.

Project and Personnel Costs
Project and personnel costs consist primarily of payroll and payroll related expenses for personnel dedicated to client assignments, and is directly associated with, and varies with, the level of client services being delivered. These costs represent the most significant expense we incur in providing service. Project costs were $5.69 million or 71% of net revenues in the second quarter of 2001 compared to $4.78 million or 49% of net revenues in the second quarter of 2000. The increase in project costs between these periods was due primarily to the increase in the number of project personnel. Project personnel increased primarily as a result of an expected increase in the number and size of our engagements. The increase in these costs as a percentage of revenue is due to the decline in our overall revenue. We anticipate lower project and personnel costs in the next two quarters due to a reduction in workforce as a part of our restructuring plan, which was implemented due to the reduced demand for consulting services. Sales and Marketing
Sales and marketing costs consist primarily of salaries, employee benefits and travel expenses of sales and marketing personnel, as well as promotional costs. Sales and marketing expenses were $1.29 million or 16% of net revenues in the second quarter of 2001, compared to $1.13 million or 12% of net revenues in the second quarter of 2000. The increase in both dollar and percentage terms is due primarily to the hiring of additional direct sales personnel. We anticipate that the dollar amount and percentage of sales and marketing expenses will increase throughout 2001.

General and Administrative
General and administrative costs consist primarily of expenses associated with our management, information technology, training and recruiting, occupancy costs, and finance and administrative groups. General and administrative expenses were $4.04 million or 50% of net revenues in the second quarter of 2001, compared to $3.36 million or 35% of net revenues in the second quarter of 2000. The dollar and percentage increases were due primarily to investments we made in attempting to grow the business, which resulted in an increase in the number of employees hired during the past year, an increase in occupancy costs related to a significant expansion of our office space, and an increase in provision for bad debts, which was $546,000 in the second quarter of 2001, as compared to $304,000 in the second quarter of 2000. Due to a reduced workforce and consolidation of office space from the realigning of our cost structure in the second quarter of 2001, we anticipate lower general and administrative expenses in the next two quarters.

Restructuring Charges
We incurred a restructuring charge of $2.19 million or 27% of net revenues in the second quarter of 2001. These items consist of severance expenses due to layoffs in the second quarter of 2001, as well as costs associated with office consolidations. These charges were taken to align our cost structure with changing market conditions, as described in Note E above.

Amortization of Intangibles and Non-cash Compensation
Amortization of intangibles and non-cash compensation was $76,000 in 2001 compared to $1.01 million in 2000. The amortization was mainly due to the acquisition of The QuickSilver Group, Inc. (“QuickSilver”) in September 1998. The QuickSilver acquisition was accounted for using the purchase method of accounting, and the purchase price was allocated to tangible and identifiable intangible assets. The fair value of identifiable intangible assets was $7.7 million and was allocated to the following categories: people and experiences, client references, client lists, and intellectual property and delivery methodology. These amounts are being amortized over economic useful lives ranging from two to four years. Approximately 98% of the costs related to the QuickSilver acquisition have been amortized as of June 30, 2001. The remaining costs will be amortized through the third quarter of 2002.

Non-cash compensation is due to stock options granted to non-shareholder employees of Camworks, Inc. and Fusion Consulting, Inc., following our acquisitions of each company. These options were granted with an exercise price less than fair market value as an incentive to the employees to continue employment with ZAMBA. The remaining deferred compensation balance related to these options is $389,000 as of June 30, 2001. The amount of this charge will be approximately $40,000 per quarter for each quarter through 2003.

Interest Income
Interest income was $36,000 in the second quarter of 2001 compared to $57,000 in the second quarter of 2000. The decrease is due to decreases in our cash and investment accounts, which were used in operating and investing activities, as well as the overall decline in interest rates in 2001.

Interest Expense
Interest expense was $55,000 in the second quarter of 2001 compared to $16,000 in the second quarter of 2000. The increase in interest charges is due to increased borrowings under our line of credit with Silicon Valley Bank, which we established in February 2001.

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

Net Loss
Our net loss for the quarter ended June 30, 2001 was ($5.29) million, or ($0.16) per share, compared to a net loss for the quarter ended June 30, 2000 of ($523,000), or ($0.02) per share.

Six months ended June 30, 2001, compared to the six months ended June 30, 2000

Net Revenues
Net revenues increased 11% to $19.83 million in the six months ended June 30, 2001 compared to $17.93 million in the six months ended June 30, 2000. The increase in revenues is principally due to increases in both the average size and number of client projects, and due to an increase in the number of billable consultants. Demand for our services increased through the fourth quarter of 2000. However, the demand has significantly declined since that time due to a reduction in demand for information technology services.

Sales and Marketing
Sales and marketing costs consist primarily of salaries, employee benefits and travel expenses of sales and marketing personnel, as well as promotional costs. Sales and marketing expenses were $3.19 million or 16% of net revenues in the six months ended June 30, 2001, compared to $2.19 million or 12% of net revenues in the six months ended June 30, 2000. The increase in both dollar and percentage terms is due primarily to the hiring of additional direct sales personnel. We anticipate that the dollar amount and percentage of sales and marketing expenses will increase throughout 2001.

General and Administrative
General and administrative costs consist primarily of expenses associated with our management, information technology, training and recruiting, occupancy costs, and finance and administrative groups. General and administrative expenses were $8.90 million or 45% of net revenues in the six months ended June 30, 2001, compared to $6.13 million or 34% of net revenues in the six months ended June 30, 2000. The dollar and percentage increases were due primarily to investments we made in attempting to grow the business, which resulted in an increase in the number of employees hired during the past year, an increase in occupancy costs related to a significant expansion of our office space, and an increase in provision for bad debts, which was $641,000 for the six month period ended June 30, 2001, as compared to $323,000 for the six month period ended June 30, 2000. We anticipate lower general and administrative expenses in the next two quarters due to a reduced workforce and consolidation of office space, due to the realigning of our cost structure.

Restructuring Charges
Restructuring charges were $2.19 million or 11% of net revenues. These items consist of severance expenses due to layoffs in the second quarter of 2001, as well as costs associated with office consolidations. These charges were taken to align our cost structure with changing market conditions, as described in Note E above.

Amortization of Intangibles and Non-cash Compensation
Amortization of intangibles and non-cash compensation was $168,000 in the six months ended June 30, 2001 compared to $2.03 million in the six months ended June 30, 2000. The amortization was mainly due to the acquisition of The QuickSilver Group, Inc. (“QuickSilver”) in September 1998, as described in the three month period analysis above.

Interest Income
Interest income was $90,000 in the six months ended June 30, 2001 compared to $131,000 in the six months ended June 30, 2000. The decrease is due to decreases in our cash and investment accounts, which were used in operating and investing activities, as well as the overall decline in interest rates in 2001.

Interest Expense
Interest expense was $79,000 in the six months ended June 30, 2001 compared to $39,000 in the six months ended June 30, 2000. The increase in interest charges is due to increased borrowings under our line of credit with Silicon Valley Bank, which we established in February 2001.

Net Loss
As a result of the above, our net loss for the six months ended June 30, 2001 was ($6.37) million, or ($0.20) per share, compared to a net loss for the six months ended June 30, 2000 of ($1.41) million, or ($0.04) per share.

Liquidity and Capital Resources

We invest predominantly in instruments that are highly liquid, investment grade and have maturities of less than one year. At June 30, 2001, we had approximately $4.9 million in cash and cash equivalents compared to $4.8 million at December 31, 2000.

Cash used in operating activities was $3.1 million for the six months ended June 30, 2001 and resulted primarily from a loss before amortization, depreciation and other non-cash stock compensation charges of $5.9 million, which was offset by a decrease in accounts receivable of $2.6 million. Cash used in operating activities was $2.0 million for the six months ended June 30, 2000, due primarily to income before amortization, depreciation and other non-cash stock compensation charges of $1.1 million, an increase in accounts payable of $575,000, and an increase in deferred revenue of $568,000, but offset by increases in accounts receivable of $2.4 million and a decrease in accrued expenses of $1.4 million.

Cash used in investing activities was $720,000 for the six months ended June 30, 2001, and primarily resulted from the purchase of property and equipment of $534,000 and the increase in restricted cash of $207,000. Cash used in investing activities was $1.2 million for the six months ended June 30, 2000 and primarily resulted from the purchase of property and equipment of $535,000 and the increase in notes receivable to related parties of $754,000.

Cash provided by financing activities was $3.9 million for the six months ended June 30, 2001 and consisted primarily of cash received from the line of credit of $2.0 million and cash received from the sale of common stock to Joseph B. Costello, a member of the board of directors, of $2.0 million. Cash provided by financing activities was $365,000 for the six months ended June 30, 2000 and consisted of cash received from the sale of common stock upon the exercise of stock options of $647,000, which was offset partially by payments of outstanding debt of $282,000.

In February 2001 (and as amended on August 2, 2001), we established a secured revolving credit facility with Silicon Valley Bank of up to a maximum of $5.0 million based on eligible collateral. Borrowings under this line of credit bear interest at the bank’s prime rate plus 2.0%, and are payable monthly. This agreement requires that we maintain certain financial covenants and levels of tangible net worth. This facility is renewable annually. $2.0 million was outstanding under the Silicon Valley Bank line of credit as of June 30, 2001.

On June 29, 2001, Zamba Corporation sold 2,352,942 shares of common stock at market value, to Joseph B. Costello, our Vice Chairman, for $2.0 million. In connection with this transaction, we also issued a warrant to Mr. Costello that entitles him to purchase up to 1,176,471 shares of our common stock, at an exercise price of $1.0625 per share. The warrant exercise price represents 125% of the per share price of our common stock on the date of issuance. No compensation cost will be recognized for these warrants. Compensation cost, using the Black-Scholes option-pricing model, would be $51,000 per quarter through June of 2005, if it were necessary to record such charges.

As of June 30, 2001, we had no significant capital spending or purchase commitments, except for a commitment of approximately $325,000 relating to professional services software. We had cash and cash equivalents totaling $4.9 million and working capital of $2.5 million. We also have a secured revolving credit facility with Silicon Valley Bank that allows us to withdraw up to $5.0 million based on eligible accounts receivable. Under the secured revolving credit facility, we must be in compliance with certain tangible net worth covenants. We believe that our existing cash and cash equivalents, together with cash provided from operations and our secured revolving credit facility, should be sufficient to meet our working capital and capital expenditure requirements in the near term. We will also continue to explore possibilities for additional financing, which may include debt, equity, or other forms of financing. We cannot be certain that additional financing will be available to us on favorable terms if required, or at all. If our financial performance causes us to violate the covenants in our secured revolving credit facility or adversely affects the amount of our eligible accounts receivable, and we are unable to obtain additional financing, we may not be able to meet our near term cash requirements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risk from changes in security prices and interest rates. Market fluctuations could impact our results of operations and financial condition. We are exposed to certain market risks based on our outstanding debt obligations of $776,000 at June 30, 2001, as well as our line of credit with Silicon Valley Bank, under which $2.0 million was outstanding at June 30, 2001. The interest rates charged on our long-term debt obligations range from 6.0% to 10.5%, and the obligations mature monthly and quarterly through December 2003. We do not invest in any derivative financial instruments. Excess cash is invested in short-term low-risk vehicles, such as money market investments. Changes in interest rates are not expected to have a material adverse effect on our business, financial condition or results of operations.

On February 27, 2001 (and as amended on August 2, 2001), we established a secured revolving credit facility with Silicon Valley Bank. Borrowings under this line of credit bear interest at the bank’s prime rate plus 2.0%. The interest is payable monthly.

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

Certain statements in this Quarterly Report on Form 10-Q are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this Quarterly Report on Form 10-Q, the words “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “intends,” “potential” or “continue” and similar expressions are generally intended to identify forward-looking statements. Because these forward-looking statements involve risks and uncertainties, actual results could differ materially from those expressed or implied by these forward-looking statements. These statements are only predictions. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance and/or achievements.

Factors that may impact forward-looking statements include, among others, the growth rate of the marketplace for customer-centric solutions, our ability to develop skills in implementing customer-centric solutions, the ability of our partners to maintain competitive products, the impact of competition and pricing pressures from actual and potential competitors with greater financial resources, our ability to obtain large-scale consulting services agreements, client decision-making processes, changes in expectations regarding the information technology industry, our ability to hire and retain competent employees, our ability to make acquisitions under advantageous terms and conditions, our success in integrating acquisitions into our business and our culture and possible costs incurred related to the integration, our ability to grow revenues from acquired companies, possible changes in collections of accounts receivable and notes receivable, changes in general economic conditions and interest rates, and other factors identified in our filings with the Securities and Exchange Commission, including those identified in Exhibit 99 to our Annual Report on Form 10-K. We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are subject to various legal proceedings and claims that arise in the ordinary course of business. We currently believe that resolving these matters will not have a material adverse effect on our business, financial condition or results of operations.

Item 2. Changes in Securities

On June 29, 2001, Zamba Corporation sold 2,352,942 shares of common stock to Joseph B. Costello, our Vice Chairman, for $2,000,000. In connection with this transaction, we also issued a warrant to Mr. Costello that entitles him to purchase up to 1,176,471 shares of our common stock, at an exercise price of $1.0625 per share. The warrant exercise price represents 125% of the per share price of our common stock on the date of issuance. Because the transaction did not involve a public offering, the shares of our common stock were deemed to be issued pursuant to an exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended.

Item 3. Defaults Upon Senior Securities
None

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

Zamba held its Annual Meeting on May 17, 2001. Two proposals were presented at the Annual Meeting for voting by the stockholders: (i) the election of directors; and (ii) the approval of an increase in the authorized number of shares of common stock. The stockholders approved both proposals.

Each person nominated for director was elected. For Joseph B. Costello, 24,911,873 votes were cast in favor of his election, and 2,972,304 votes were withheld. For Dixon R. Doll, 26,564,035 votes were cast in favor of his election, and 1,320,142 votes were withheld. For Paul D. Edelhertz, 25,217,688 votes were cast in favor of his election, and 2,666,489 votes were withheld. For Douglas M. Holden, 25,176,034 votes were cast in favor of his election, and 2,708,143 votes were withheld. For John Olsen, 24,901,947 votes were cast in favor of his election, and 2,982,230 votes were withheld. For Sven A. Wehrwein, 26,561,744 votes were cast in favor of his election, and 1,322,433 votes were withheld.

A total of 24,923,201 votes were cast in favor of the proposal to approve the number of authorized shares of common stock, 2,798,130 votes were cast against, 162,846 votes were abstentions, and there were no broker non-votes.

Item 5. Other Information
None

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits: (See attached exhibit index)

(b) Reports on Form 8-K:

On May 23, 2001 we filed a report on Form 8-K to report a reduction in the number of personnel and stating that revenues and earnings for the second fiscal quarter would be lower than previously expected.

On July 2, 2001, we filed a report on Form 8-K to report the purchase of 2,352,942 shares of common stock by Joseph B. Costello, our Vice Chairman. We also issued a warrant to Mr. Costello that entitles him to purchase up to 1,176,471 shares of common stock at an exercise price of $1.0625 per share.

SIGNATURES

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

	ZAMBA CORPORATION
	By:	/s/ Douglas M. Holden
		Douglas M. Holden
		President and Chief Executive Officer

	By:	/s/ Michael H. Carrel
		Michael H. Carrel
		Executive Vice President and Chief Financial Officer

	Dated: August 8, 2001

EXHIBIT INDEX

EXHIBIT NUMBER	TITLE
10.01	Press release dated May 22, 2001 (Incorporated by reference to Exhibit 99 to the Registrant’s Current Report on Form 8-K dated May 23, 2001)
10.02	Stock Purchase Agreement dated June 29, 2001, between Zamba Corporation and Joseph B. Costello (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated July 2, 2001)
10.03	Warrant to Purchase Shares of Common Stock issued by Zamba Corporation to Joseph B. Costello (Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K dated July 2, 2001)
10.04	Press release dated July 2, 2001 (Incorporated by reference to Exhibit 99 to the Registrant’s Current Report on Form 8-K dated July 2, 2001)
10.05	Settlement and Release Agreement dated August 2, 2001, between the Registrant and Paul Edelhertz
10.06	Amendment to Loan Document as of June 30, 2001, between the Registrant and Silicon Valley Bank
10.07	Warrant to Purchase Stock dated August 2, 2001, between the Registrant and Silicon Valley Bank
10.08	Fifth Amended and Restated Certificate of Incorporation of Zamba Corporation, dated August 3, 2001.

EX-10.05 3 j1311_ex10d05.htm EX-10.05 Prepared by MerrillDirect

Exhibit 10.05

Settlement and Release Agreement

This is a Settlement and Release Agreement (“Agreement”) between Zamba Corporation (“Zamba”) and Paul Edelhertz (“Edelhertz”) providing for Edelhertz’ friendly transition from the Zamba payroll to a more traditional Chairman role.

1. Effective Date. The Effective Date of this Agreement shall be the sixteenth (16^th) day following Zamba’s receipt of an unmodified version of this document bearing Edelhertz’ original signature. May 22, 2001, will be considered the last date on which Edelhertz will be on the regular Zamba payroll (“Transition Date”), and no payment will be provided by Zamba after that date except as stated in this Settlement and Release Agreement.

2. Consideration. In exchange for Edelhertz’ written consent to this Agreement, Zamba agrees to pay Edelhertz on a salary continuation basis through the earlier of December 31, 2001, or until Employee begins receiving regular income from consulting or employment (the “Pay Period”); (ii) except as set forth at the end of this Section 2, allow Edelhertz’ existing stock options to continue to vest according to their current schedules for so long as Edelhertz remains a member of the Board of Directors of Zamba; and (iii) enter into that certain Stock Option Agreement attached hereto and incorporated herein as Exhibit A.

Salary continuation will be based on Edelhertz’ current base salary, and will not include bonuses, commissions, amounts realized from the exercise of stock options, or any other form of monetary or non-monetary compensation, except as expressly set forth in this Agreement. For Edelhertz’ consent to be valid, he must return this Agreement in a signed and unmodified manner to Zamba, in accordance with the terms of this Agreement. Settlement pay will be reduced by usual and customary withholdings and deductions. Edelhertz acknowledges that none of the consideration or benefits set forth in this Agreement are to be made until this Agreement is properly executed and returned to Zamba, and that any payments that are tolled because the Agreement is not executed will be paid in the payroll following execution and return of this Agreement. Following the end of the Pay Period, Zamba will also pay Edelhertz the value of his accrued yet unused Personal Time Off (“PTO”) as of that date. PTO shall not continue to accrue following the Transition Date. Notwithstanding anything else in this Agreement regarding his stock options, Edelhertz acknowledges and agrees that, as further consideration for Zamba’s consent to this Agreement, all stock options granted by Zamba to him in December 2000 shall be cancelled and of no further effect, and Edelhertz will take all such actions as may be reasonably requested by Zamba to effectuate such cancellation.

3. Benefits. Until the Transition Date, Zamba will continue Edelhertz’ benefits on the same basis as Edelhertz currently receives. Following the Transition Date, Edelhertz will be eligible to continue his benefits as provided under the Continuing Omnibus Budget Reconciliation Act (“COBRA”), provided that during the Pay Period, Zamba will continue to pay the premiums for Edelhertz’ benefits as such are currently being paid by Zamba, subject to prior receipt from Edelhertz of the same contributions that Edelhertz currently makes through salary withholding.

4. No Other Remuneration. Edelhertz acknowledges and agrees that he is not entitled to any remuneration from Zamba, except as provided in this Agreement, that a material portion of the payments and other benefits contained in this Agreement are good and valuable consideration to which he would not be entitled in the absence of this Agreement, and, provided that Zamba does not breach this Agreement, that he will not seek any further compensation from Zamba, or its current or former officers, directors, shareholders, employees, attorneys, successors and assigns for any claimed damages, expenses, costs, fees or other liability of any kind in connection with his employment with Zamba and the termination of that employment.

5. Release. Edelhertz accepts the valuable benefits of this Agreement, and acknowledges that Zamba owes him nothing else. In return, Edelhertz releases and forever discharges Zamba, and any company associated or affiliated with Zamba, and Zamba’s officers, directors, shareholders, employees, agents and anybody else who works for or with Zamba, of and from any and all legal claims, rights, demands, actions, obligations, and causes of action of any and every kind, nature and character, known or unknown, which Edelhertz may now have, or has ever had, arising from or in any way connected to Edelhertz’ employment with Zamba, and the termination of that employment.

Notwithstanding any other federal, state or local statute, regulation, rule or order, Edelhertz agrees that this Release applies to any and all legal claims of any kind whatsoever, whether statutory, common law, constitutional, or otherwise, including but not limited to: all “wrongful discharge” and ”constructive damage” claims; all claims related to any contracts of employment, express or implied; any claims for defamation, misrepresentation, fraud, or breach of the covenant of good faith and fair dealing, express or implied; any claim for negligent or intentional infliction of emotional distress; any claim for negligence; any claims for attorneys’ fees or costs; any tort claims of any nature; any claims under federal, state, or municipal statute or ordinance; any other contract, tort, and employment discrimination claims, including those under the Age Discrimination in Employment Act, the Older Workers’ Benefit Protection Act, Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, 42 U.S.C. Section 1981, the Americans with Disabilities Act (the “ADA”), the Employee Retirement Income and Security Act, the Federal Rehabilitation Act of 1973, the Federal Family and Medical Leave Act, the Worker Adjustment and Retraining Notification Act, Massachusetts General Laws Chapter 151B, as amended, and any and all other age, sex and disability claims recognized under the Minnesota Human Rights Act and all other federal, state, and local laws.

Edelhertz acknowledges and agrees that for his waiver, he received consideration in exchange, in excess of anything of value to which he may already have been entitled. Edelhertz further acknowledges that he was and hereby is advised to consult with an attorney prior to executing this Agreement. Edelhertz also acknowledges that he was given a reasonable period of time to consider whether or not to sign this Agreement starting from the date Edelhertz first receives a copy of this Agreement.

Edelhertz also promises not to sue or start any other legal proceedings against any party he released above. Edelhertz understands that while he is giving up legal claims he may think he has, Zamba would dispute those claims, vigorously defend itself, and not pay Edelhertz any of the benefits of this Agreement. Thus, this Agreement will avoid costly and lengthy legal disputes, and allows Zamba and Edelhertz to compromise any differences they may have and buy the peace.

6. No Claims Previously Made by Edelhertz. Edelhertz represents that he has not filed any complaints, claims, or actions against Zamba, or its current or former officers, directors, shareholders, Employees, attorneys, successors and assigns, or representatives with any state, federal, or local agency or court, and that he will not do so at any time after the Effective Date.

7. No Admission of Liability. This Agreement and compliance with this Agreement shall not be construed as an admission by Zamba of any liability to Edelhertz, whatsoever. Zamba specifically disclaims any liability to Edelhertz for any matter arising from or in any way connected with Edelhertz’ employment with Zamba and the Transition of that employment.

8. Rescission Notice. Within fifteen calendar days after signing this Agreement, Edelhertz has the right to rescind only that provision of this paragraph releasing Zamba from liability for charges or actions brought pursuant to the ADEA, Title VII, ADA and Minnesota Human Rights Act. To be effective, the rescission must be in writing and delivered to Zamba, at 3033 Excelsior Blvd., Suite 200, Minneapolis, MN 55416. If delivered by mail, the rescission must be:

A.	Postmarked within the 15-day period;
B.	Properly addressed to Zamba; and
C.	Sent by certified mail, return receipt requested.

In the event Edelhertz rescinds this Agreement, Zamba has no obligations to him under this Agreement, and Edelhertz agrees to repay Zamba any funds already paid to him under this Agreement. This Agreement shall not become effective until the 15-day rescission period has elapsed.

9. Confidentiality. It is the intent of the parties that the terms upon which this agreement is based will be forever treated as confidential. Edelhertz may disclose the terms of this Agreement only to his spouse, attorney, accountant, and tax advisor or preparer. Zamba may disclose the terms of this Agreement to those of its agents or Employees who have a legitimate need to know such terms. Both parties agree not to make any disparaging or negative statements about the other party or the employment relationship between Edelhertz and Zamba, either in the employment or personal context. Edelhertz shall not in any way assist or encourage any individual to pursue a claim against Zamba.

10. Covenants of Non-Competition and Non-Solicitation. Edelhertz held a position of trust with Zamba, which allowed Edelhertz access to extremely confidential information regarding Zamba’s clients, employees and employment practices. Therefore, as a separate covenant of this Agreement, Edelhertz agrees that, for a period beginning on the Effective Date and continuing for one (1) year following the end of the Pay Period, Edelhertz shall not (a) directly or indirectly solicit, do business with, deliver products to, render services to or adversely affect Zamba’s relationship with any client or prospective client of Zamba; or (b) solicit for employment or discuss employment opportunities with any of Zamba’s personnel. These covenants apply to Edelhertz regardless of whether he is acting in his individual capacity or as an employee, contractor, advisor, director, officer, or partner of any third party. Further, Edelhertz expressly acknowledges the confidentiality of Zamba’s client and employment information, including the names of Zamba’s clients and employees and their contact information, needs, wants, tasks, skills, compensation, and opinions about Zamba, and agrees not to disclose such confidential information to any third party, regardless of Edelhertz’ relationship with such third party, for so long as such information remains confidential.

11. Voluntary Agreement. Both Zamba and Edelhertz enter into this Agreement voluntarily, after having had the opportunity to review it and consult with advisors, including legal counsel, of their choice. This Agreement sets forth the entire agreement between the parties regarding the subject matter herein, superseding any and all other agreements, understandings, memoranda, or proposals, whether written or oral, between the parties regarding the same or similar subject matter.

12. No Reliance on Representations. Each party to this Agreement represents and acknowledges that in executing this Agreement that party does not rely and has not relied upon any representation or statement made by the other party or by any of such other party’s agents, attorneys, or representatives with regard to the subject matter, basis or effect of this Agreement or otherwise, other than those representations and statements specifically stated in this written Agreement.

13. Successors and Assigns. This Agreement shall be binding upon the parties to this Agreement and upon their respective heirs, administrators, representatives, executors, successors, and assigns, and shall inure to the benefit of those parties and each of them and to their respective heirs, administrators, representatives, executors, successors, and assigns.

14. Severability. Should any provision of this Agreement be declared or be determined by any court of competent jurisdiction to be illegal, invalid, or unenforceable, the legality, validity, and enforceability of the remaining parts, terms, or provisions shall not be affected thereby, and said illegal, unenforceable, or invalid part, term, or provision shall be deemed not to be a part of this Agreement.

15. Interpretation of Agreement. This Agreement shall be interpreted in accordance with the plain meaning of its terms and not strictly for or against any of the parties.

16. Legal Expenses. In the event of litigation or arbitration between the parties arising out or relating to this Agreement, the prevailing party will be entitled to recover court or arbitration costs and reasonable fees of attorneys, accountants and expert witnesses incurred by such party in connection with the action or arbitration, including such costs and fees incurred because of any appeals. The prevailing party also shall be entitled to recover all such costs and fees that may be incurred in enforcing any judgment or award, and this provision shall not be merged into any judgment but shall survive any judgment.

17. Specific Performance. Each party agrees that a breach of this Agreement would cause irreparable harm to the other party, and therefore agrees that the non-breaching party may seek a temporary restraining order, a temporary or permanent injunction or any other equitable relief by initiating a court action upon a breach or threatened breach of this Agreement.

18. Governing Law. This Agreement shall be governed in all respects, including validity, interpretation and effect, by the laws of the State of Minnesota, except for its choice of laws principles.

\s\ Paul Edelhertz	Date: August 2, 2001
Paul Edelhertz



\s\ Michael Carrel	Date: August 2, 2001
Zamba Corporation

Exhibit A
STOCK OPTION AGREEMENT

THIS STOCK OPTION AGREEMENT is made as of this ______ day of ________________, _______, by and between PAUL EDELHERTZ (Edelhertz) and ZAMBA CORPORATION, a Delaware corporation (Zamba).

IN CONSIDERATION of the mutual promises of the parties hereto and the mutual benefits to be gained by the performance herein, the parties agree as follows:

1.)	Grant of Option – Edelhertz hereby grants to Zamba an option to purchase an aggregate of Two Hundred Fifty Thousand (250,000) shares of the common stock of Zamba owned by him (collectively “the Shares”) for an agreed upon amount (“the Purchase Price”). Zamba hereby grants to Edelhertz an option to put the Shares to Zamba for the same Purchase Price. Unless otherwise agreed, Zamba must exercise the option to purchase all of the shares if it desires to purchase any of the shares, and Edelhertz must put to Zamba all of the shares if he desires to put any of the shares.

2.)	Purchase Price – The Purchase Price shall be equal to the total cumulative amount due and payable (i.e., principal and interest) on a Promissory Note dated December 26, 2000, between Zamba and Edelhertz, as of the date of the exercise of an option under this Agreement

3.)	Exercise of Options – If Edelhertz or Zamba desire to execute one of the foregoing options, they may do so by written notice to the other. The notice shall:

	(a)	State the election to exercise the option; and
	(b)	Be signed by the party exercising the option.

	Within fifteen (15) days following the date of such notice, Edelhertz shall deliver, assign and transfer to Zamba, stock certificates representing 250,000 shares of Zamba. Representing full payment for the Shares, Zamba shall release Edelhertz from any further obligations on a Promissory Note dated December 26, 2000, and treat such note as paid in full and deliver evidence of such to Edelhertz.

4.)	Adjustment Provision – If there is any capital reorganization or reclassification of the capital stock of Zamba, or stock dividend, or any consolidation or merger of Zamba with any other entity, the options granted herein shall apply to all new shares acquired by Edelhertz with respect to the Shares. Thus, by way of example, if there is a stock split, the options described in the Agreement shall apply not only to the Shares, but also to the additional shares acquired by Edelhertz with respect to the Shares, without any increase in the purchase price. This adjustment shall not, however, apply to any other shares of Zamba that may be acquired by Edelhertz through purchase.

5.)	Term of Options – If neither of the options described in this Agreement are exercised within ten (10) years from the date hereof, then either party shall have the right to terminate both options at any time thereafter upon delivery of thirty (30) days’ prior written notice to the other. If neither party exercised their option within thirty (30) days or receipt of such notice, all options described herein shall expire.

6.)	Representations of Edelhertz – Edelhertz represents and warrants that he is the owner, beneficially and of record, of all the Shares, free and clear of all liens and encumbrances; that the sale of the Shares to Zamba will not result in or constitute a breach of any term or provision of any agreement to which Edelhertz is a party; that Edelhertz has the right, power, legal capacity, and authority to enter into and perform his obligations under this Agreement, and no approval or consent of another person is necessary in connection with it; and that Edelhertz shall take no action that will result in these representations being untrue at any time prior to the purchase of the Shares by Zamba.

7.)	Miscellaneous –

	(a)	Counterparts – This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument.
	(b)	Amendments – This Agreement may be amended in whole or in part at any time by a written instrument setting forth such changes and signed by all of the parties hereto.
	(c)	Benefit – This Agreement shall be binding upon and inure to the benefit of all of the parties hereto, their heirs, executors, administrators, successors and assigns, and the parties hereby agree for themselves and their heirs, executors, administrators, successors and assigns to execute any instrument and to perform any acts which may be necessary or proper to carry out the purposes of this Agreement.
	(d)	Situs – This Agreement was executed in Minneapolis, Minnesota and shall be governed by the laws of the State of Minnesota.
	(e)	Entire Agreement – This Agreement sets fort the entire understanding between the parties, there being no terms, conditions, warranties or representations other than those contained herein.

IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the day and year first above written.

\s\ Paul Edelhertz

PAUL EDELHERTZ

\s\ Michael Carrel

ZAMBA CORPORATION

By:

Michael Carrel

Name

Title

EX-10.06 4 j1311_ex10d06.htm EX-10.06 Prepared by MerrillDirect

		Exhibit 10.06


Silicon Valley Bank

Amendment to Loan Documents


Borrower:	ZAMBA CORPORATION
Address:	3033 Excelsior Boulevard, Suite 200
	Minneapolis, Minnesota 55416
Date:	as of June 30, 2001

THIS AMENDMENT TO LOAN DOCUMENTS is entered into between SILICON VALLEY BANK, COMMERCIAL FINANCE DIVISION (“Silicon”), whose address is 3003 Tasman Drive, Santa Clara, California 95054, and the borrower(s) named above (individually and collectively, jointly and severally, the “Borrower”), whose chief executive office is located at the above address (“Borrower’s Address”).

The Parties agree to amend the Loan and Security Agreement between them, dated as of February 27, 2001 (as otherwise amended, the “Loan Agreement”), as follows, effective as of the date hereof. (Capitalized terms used but not defined in this Amendment, shall have the meanings set forth in the Loan Agreement.):

1. Modification of TNW Base Amount. The definition of “TNW Base Amount” set forth in Section 5 of the Schedule is hereby amended in its entirety to read as follows:

The term “TNW Base Amount” means, as of any date of determination, the amount set forth below corresponding to the time period set forth below:

(A) during the period commencing on the date of this Agreement and ending on June 30, 2001, $4,500,000;

(B) during the period commencing on July 1, 2001 and ending on September 30, 2001, $3,291,000; and

2. Additional Warrants. The following hereby is added to the Schedule, in proper numerical order, as a new Section 9(5) thereof:

(5) Warrants. On the date of execution and delivery of that certain Amendment to Loan Documents dated as of June 30, 2001 between Silicon and Borrower (the “June 30, 2001 Amendment”) (such date, the “Target Date”), Borrower shall provide Silicon with additional five-year warrants to purchase an additional 35,000 shares of common stock of the Borrower, at a price per share equal to the Target Date Designated Price (as defined herein), on terms acceptable to Silicon, all as set forth in the Warrant to Purchase Stock (the "Target Date Warrant") and related Registration Rights Agreement being executed concurrently with the June 30, 2001 Amendment. The Target Date Warrant shall be deemed fully earned on the Target Date, shall be in addition to all interest and other fees, and shall be non-refundable. As used herein, the term "Target Date Designated Price" means the average closing price of the Shares reported for the 5 trading days immediately before the Target Date.

3. Representations True. Borrower represents and warrants to Silicon that all representations and warranties set forth in the Loan Agreement, as amended hereby, are true and correct.

4. Fee. In consideration for Silicon entering into this Amendment, Borrower shall concurrently pay Silicon a fee in the amount of $5,000.00, which shall be non-refundable and in addition to all interest and other fees payable to Silicon under the Loan Documents. Silicon is authorized to charge said fee to Borrower’s loan account.

[remainder of page intentionally left blank; signature page follows]

5. General Provisions. This Amendment, the Loan Agreement, any prior written amendments to the Loan Agreement signed by Silicon and Borrower, and the other written documents and agreements between Silicon and Borrower set forth in full all of the representations and agreements of the parties with respect to the subject matter hereof and supersede all prior discussions, representations, agreements and understandings between the parties with respect to the subject hereof. Except as herein expressly amended, all of the terms and provisions of the Loan Agreement, and all other documents and agreements between Silicon and Borrower shall continue in full force and effect and the same are hereby ratified and confirmed.

Borrower:		Silicon:

ZAMBA CORPORATION		SILICON VALLEY BANK


By	\s\ Michael H. Carrel	By	\s\ J. Anthony Clarkson

	President or Vice President	Title		Vice President


By	\s\ Ian Nemerov

	Secretary

EX-10.07 5 j1311_ex10d07.htm EX-10.07 Prepared by MerrillDirect

Exhibit 10.07

THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED.

WARRANT TO PURCHASE STOCK

Corporation: ZAMBA CORPORATION
Number of Shares: 35,000
Class of Stock: Common
Initial Exercise Price: $0.86 (which is the average closing price of the Shares reported for the 5 trading days immediately before the Issue Date)
Issue Date: August 2, 2001
Expiration Date: the fifth (5^th) anniversary of the Issue Date

THIS WARRANT CERTIFIES THAT, for the agreed upon value of $1.00 and for other good and valuable consideration, SILICON VALLEY BANK ("Holder") is entitled to purchase the number of fully paid and nonassessable shares of the class of securities (the "Shares") of the corporation (the "Company") at the initial exercise price per Share (the "Warrant Price") all as set forth above and as adjusted pursuant to Article 2 of this Warrant, subject to the provisions and upon the terms and conditions set forth in this Warrant. Concurrently herewith, the Company and Holder are entering into that certain Amendment to Loan Documents, dated as of June 30, 2001, and this Warrant is the “Target Date Warrant” referred to therein.

ARTICLE 1. EXERCISE.

1.1 Method of Exercise. Holder may exercise this Warrant by delivering a duly executed Notice of Exercise in substantially the form attached as Appendix 1 to the principal office of the Company. Unless Holder is exercising the conversion right set forth in Section 1.2, Holder shall also deliver to the Company a check for the aggregate Warrant Price for the Shares being purchased.

1.2 Conversion Right. In lieu of exercising this Warrant as specified in Section 1.1, Holder may from time to time convert this Warrant, in whole or in part, into a number of Shares determined by dividing (a) the aggregate fair market value of the Shares or other securities otherwise issuable upon exercise of this Warrant minus the aggregate Warrant Price of such Shares by (b) the fair market value of one Share. The fair market value of the Shares shall be determined pursuant to Section 1.4.

1.3 Intentionally Omitted

1.4 Fair Market Value. If the Shares are traded in a public market, the fair market value of the Shares shall be the closing price of the Shares reported for the business day immediately before Holder delivers its Notice of Exercise to the Company. If the Shares are not traded in a public market, the Board of Directors of the Company shall determine fair market value in its reasonable good faith judgment. The foregoing notwithstanding, if Holder advises the Board of Directors in writing that Holder disagrees with such determination, then the Company and Holder shall promptly agree upon a reputable investment banking firm to undertake such valuation. If the valuation of such investment banking firm is greater than that determined by the Board of Directors, then all fees and expenses of such investment banking firm shall be paid by the Company. In all other circumstances, such fees and expenses shall be paid by Holder. 1.5 Delivery of Certificate and New Warrant. Promptly after Holder exercises or converts this Warrant, the Company shall deliver to Holder certificates for the Shares acquired and, if this Warrant has not been fully exercised or converted and has not expired, a new Warrant representing the Shares not so acquired.

1.6 Replacement of Warrants. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of loss, theft or destruction, on delivery of an indemnity agreement reasonably satisfactory in form and amount to the Company or, in the case of mutilation, on surrender and cancellation of this Warrant, the Company at its expense shall execute and deliver, in lieu of this Warrant, a new warrant of like tenor.

1.7 Repurchase on Sale, Merger, or Consolidation of the Company.

1.7.1. "Acquisition". For the purpose of this Warrant, "Acquisition" means any sale, license, or other disposition of all or substantially all of the assets of the Company, or any reorganization, consolidation, or merger of the Company where the holders of the Company's securities before the transaction beneficially own less than 50% of the outstanding voting securities of the surviving entity after the transaction.

1.7.2. Assumption of Warrant. Upon the closing of any Acquisition the successor/acquiring entity shall assume the obligations of this Warrant, and this Warrant shall be exercisable for the same securities, cash, and property as would be payable for the Shares issuable upon exercise of the unexercised portion of this Warrant as if such Shares were outstanding on the record date for the Acquisition and subsequent closing. The Warrant Price shall be adjusted accordingly.

ARTICLE 2. ADJUSTMENTS TO THE SHARES.

2.1 Stock Dividends, Splits, Etc. If the Company declares or pays a dividend on its common stock (or the Shares if the Shares are securities other than common stock) payable in common stock, or other securities, subdivides the outstanding common stock into a greater amount of common stock, or, if the Shares are securities other than common stock, subdivides the Shares in a transaction that increases the amount of common stock into which the Shares are convertible, then upon exercise of this Warrant, for each Share acquired, Holder shall receive, without cost to Holder, the total number and kind of securities to which Holder would have been entitled had Holder owned the Shares of record as of the date the dividend or subdivision occurred.

2.2 Reclassification, Exchange or Substitution. Upon any reclassification, exchange, substitution, or other event that results in a change of the number and/or class of the securities issuable upon exercise or conversion of this Warrant, Holder shall be entitled to receive, upon exercise or conversion of this Warrant, the number and kind of securities and property that Holder would have received for the Shares if this Warrant had been exercised immediately before such reclassification, exchange, substitution, or other event. Such an event shall include any automatic conversion of the outstanding or issuable securities of the Company of the same class or series as the Shares to common stock pursuant to the terms of the Company's Articles of Incorporation upon the closing of a registered public offering of the Company's common stock. The Company or its successor shall promptly issue to Holder a new Warrant for such new securities or other property. The new Warrant shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article 2 including, without limitation, adjustments to the Warrant Price and to the number of securities or property issuable upon exercise of the new Warrant. The provisions of this Section 2.2 shall similarly apply to successive reclassifications, exchanges, substitutions, or other events. 2.3 Adjustments for Combinations, Etc. If the outstanding shares are combined or consolidated, by reclassification or otherwise, into a lesser number of shares, the Warrant Price shall be proportionately increased.

2.4 Intentionally Omitted

2.5 No Impairment. The Company shall not, by amendment of its Articles of Incorporation or through a reorganization, transfer of assets, consolidation, merger, dissolution, issue, or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed under this Warrant by the Company, but shall at all times in good faith assist in carrying out of all the provisions of this Article 2 and in taking all such action as may be necessary or appropriate to protect Holder's rights under this Article against impairment. If the Company takes any action affecting the Shares or its common stock other than as described above that adversely affects Holder's rights under this Warrant, the Warrant Price shall be adjusted downward and the number of Shares issuable upon exercise of this Warrant shall be adjusted upward in such a manner that the aggregate Warrant Price of this Warrant is unchanged.

2.6 Fractional Shares. No fractional Shares shall be issuable upon exercise or conversion of the Warrant and the number of Shares to be issued shall be rounded down to the nearest whole Share. If a fractional share interest arises upon any exercise or conversion of the Warrant, the Company shall eliminate such fractional share interest by paying Holder an amount computed by multiplying the fractional interest by the fair market value of a full Share.

2.7 Certificate as to Adjustments. Upon each adjustment of the Warrant Price, the Company at its expense shall promptly compute such adjustment, and furnish Holder with a certificate of its Chief Financial Officer setting forth such adjustment and the facts upon which such adjustment is based. The Company shall, upon written request, furnish Holder a certificate setting forth the Warrant Price in effect upon the date thereof and the series of adjustments leading to such Warrant Price.

ARTICLE 3. REPRESENTATIONS AND COVENANTS OF THE COMPANY.

3.1 Representations and Warranties. The Company hereby represents and warrants to the Holder as follows:

(a) [intentionally omitted]

(b) All Shares which may be issued upon the exercise of the purchase right represented by this Warrant, and all securities, if any, issuable upon conversion of the Shares, shall, upon issuance, be duly authorized, validly issued, fully paid and nonassessable, and free of any liens and encumbrances except for restrictions on transfer provided for herein or under applicable federal and state securities laws.

(c) The Capitalization Table attached to this Warrant is true and complete as of the Issue Date in all material respects.

3.2 Notice of Certain Events. If the Company proposes at any time (a) to declare any dividend or distribution upon its common stock, whether in cash, property, stock, or other securities and whether or not a regular cash dividend; (b) to offer for subscription pro rata to the holders of any class or series of its stock any additional shares of stock of any class or series or other rights; (c) to effect any reclassification or recapitalization of common stock; (d) to merge or consolidate with or into any other corporation, or sell, lease, license, or convey all or substantially all of its assets, or to liquidate, dissolve or wind up; or (e) offer holders of registration rights the opportunity to participate in an underwritten public offering of the company's securities for cash, then, in connection with each such event, the Company shall give Holder (1) at least 20 days prior written notice of the date on which a record will be taken for such dividend, distribution, or subscription rights (and specifying the date on which the holders of common stock will be entitled thereto) or for determining rights to vote, if any, in respect of the matters referred to above; (2) in the case of the matters referred to in (c) and (d) above at least 20 days prior written notice of the date when the same will take place (and specifying the date on which the holders of common stock will be entitled to exchange their common stock for securities or other property deliverable upon the occurrence of such event); and (3) in the case of the matter referred to in (e) above, the same notice as is given to the holders of such registration rights. 3.3 Information Rights. So long as the Holder holds this Warrant and/or any of the Shares, the Company shall deliver to the Holder (a) promptly after mailing, copies of all notices or other written communications to the shareholders of the Company, (b) within one hundred twenty (120) days after the end of each fiscal year of the Company, the annual audited financial statements of the Company certified by independent public accountants of recognized standing and (c) such other financial statements required under and in accordance with any loan documents between Holder and the Company (or if there are no such requirements [or if the subject loan(s) no longer are outstanding]), then within forty–five (45) days after the end of each of the first three quarters of each fiscal year, the Company's quarterly, unaudited financial statements.

3.4 Registration Under Securities Act of 1933, as amended. The Company agrees that the Shares shall be subject to the registration rights set forth for the Shares in that certain Registration Rights Agreement, dated as of the Issue Date, between the Company and Holder (as the same may be amended, restated, supplemented, or otherwise modified from time to time).

ARTICLE 4. MISCELLANEOUS.

4.1 Term. This Warrant is exercisable, in whole or in part, at any time and from time to time on or before the Expiration Date set forth above.

4.2 Legends. This Warrant and the Shares (and the securities issuable, directly or indirectly, upon conversion of the Shares, if any) shall be imprinted with a legend in substantially the following form (unless and until registered under the Securities Act (and, upon such registration, the Company agrees to cooperate in the prompt removal of such legend requested by the Holder)):

THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED.

4.3 Compliance with Securities Laws on Transfer. This Warrant and the Shares issuable upon exercise this Warrant (and the securities issuable, directly or indirectly, upon conversion of the Shares, if any) may not be transferred or assigned in whole or in part without compliance with applicable federal and state securities laws by the transferor and the transferee (including, without limitation, the delivery of investment representation letters and legal opinions reasonably satisfactory to the Company, as reasonably requested by the Company). The Company shall not require Holder to provide an opinion of counsel if the transfer is to an affiliate of Holder or if there is no material question as to the availability of current information as referenced in Rule 144(c), Holder represents that it has complied with Rule 144(d) and (e) in reasonable detail, the selling broker represents that it has complied with Rule 144(f), and the Company is provided with a copy of Holder s notice of proposed sale.

4.4 Transfer Procedure. Subject to the provisions of Section 4.3, Holder may transfer all or part of this Warrant or the Shares issuable upon exercise of this Warrant (or the securities issuable, directly or indirectly, upon conversion of the Shares, if any) at any time to Silicon Valley Bancshares or The Silicon Valley Bank Foundation, or to any affiliate of Holder, or, to any other transferree by giving the Company notice of the portion of the Warrant being transferred setting forth the name, address and taxpayer identification number of the transferee and surrendering this Warrant to the Company for reissuance to the transferee(s) (and Holder if applicable). Unless the Company is filing financial information with the SEC pursuant to the Securities Exchange Act of 1934, the Company shall have the right to refuse to transfer any portion of this Warrant to any person who directly competes with the Company. 4.5 Notices. All notices and other communications from the Company to the Holder, or vice versa, shall be deemed delivered and effective when given personally or mailed by first–class registered or certified mail at such address as may have been furnished to the Company or the Holder, as the case may be, in writing by the Company or such holder from time to time. All notices to be provided under this Warrant shall be sent to the following address:

Silicon Valley Bank

Attn: Treasury Department

3003 Tasman Drive

Santa Clara, CA 95054

4.6 Waiver. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought.

4.7 Attorneys Fees. In the event of any dispute between the parties concerning the terms and provisions of this Warrant, the party prevailing in such dispute shall be entitled to collect from the other party all costs incurred in such dispute, including reasonable attorneys' fees.

[remainder of page intentionally left blank; signature page follows] 4.8 Governing Law. This Warrant shall be governed by and construed in accordance with the laws of the State of California, without giving effect to its principles regarding conflicts of law.

"COMPANY"

ZAMBA CORPORATION

By: \s\ Doug M. Holden

Name: Doug M. Holden

(Print)

Title: President

By: \s\ Michael H. Carrel

Name: Michael H. Carrel

(Print)

Title: Chief Financial Officer

APPENDIX 1

NOTICE OF EXERCISE

1. The undersigned hereby elects to purchase __________ shares of the Common/Preferred Series _____ [Strike one] Stock of __________, pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price of such shares in full.

1. The undersigned hereby elects to convert the attached Warrant into Shares/cash [strike one] in the manner specified in the Warrant. This conversion is exercised with respect to ____________ of the Shares covered by the Warrant.

[Strike paragraph that does not apply.]

2. Please issue a certificate or certificates representing said shares in the name of the undersigned or in such other name as is specified below:

___________________________________________
(Name)

___________________________________________

___________________________________________
(Address)

3. The undersigned represents it is acquiring the shares solely for its own account and not as a nominee for any other party and not with a view toward the resale or distribution thereof except in compliance with applicable securities laws.

____________________________________
(Signature)

____________________
(Date)

EX-10.08 6 j1311_ex10d08.htm EX-10.08 Prepared by MerrillDirect

Exhibit 10.08

FIFTH AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF
ZAMBA CORPORATION

Zamba Corporation, a corporation organized and existing under the laws of the State of Delaware hereby certifies as follows:

FIRST: The name of this corporation (hereinafter the “Corporation”) is ZAMBA CORPORATION. The name was changed to Zamba Corporation from Racotek, Inc. on October 5, 1998. The corporation was originally incorporated under the name RaCoTek, Inc. and the date of filing of its original Certificate of Incorporation with the Secretary of State of the State of Delaware is August 15, 1990. The current articles of incorporation, the Fourth Amended and Restated Certificate of Incorporation, are dated December 30, 1998.

SECOND: The text of the Fourth Amended and Restated Certificate of Incorporation of the Corporation is hereby amended and restated in its entirety to become the Fifth Amended and Restated Certificate of Incorporation and to read as follows:

ARTICLE 1

The name of this Corporation is Zamba Corporation.

ARTICLE 2

The address of the registered office of the Corporation in the State of Delaware is The Corporation Trust Company, Corporation Trust Center, 1209 Orange Street, Wilmington, County of New Castle, Delaware 19801, and the name of the registered agent of the Corporation in the State of Delaware at such address is: The Corporation Trust Company.

ARTICLE 3

The purposes and powers of the Corporation shall be to conduct any lawful act or activity, for which corporations may be organized under the General Corporation Law of the State of Delaware.

ARTICLE 4

Section 1. Classes of Stock

This Corporation is authorized to issue two classes of stock to be designated, respectively, “Common Stock” and “Preferred Stock”, both of which shall have a par value of $0.01 per share. The total number of shares which the Corporation is authorized to issue is 125,000,000, of which 120,000,000 shares shall be Common Stock and 5,000,000 shares shall be Preferred Stock.

Section 2. Designation of Series of Preferred Stock

The Board of Directors is authorized to provide for the issuance of the shares of Preferred Stock in one or more series, and, by filing a certificate of designation pursuant to the General Corporation Law of the State of Delaware, to establish from time to time the number of shares to be included in each such series, to fix the designation, powers, preferences and rights of the shares of each such series and any qualifications, limitations or restrictions thereof, and to increase or decrease the number of shares of any such series (but not above the total number of shares of Preferred Stock authorized when combined with other series of Preferred Stock nor below the number of shares of such series then outstanding). In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status that they had prior the adoption of the resolution originally fixing the number of shares of such series.

Except as may be expressly provided in any Certificate of Designation designating any series of Preferred Stock pursuant to the foregoing provisions of this Article 4, any new series of Preferred Stock may be designated, fixed and determined as provided herein by the Board of Directors without approval of the holders of Common Stock or the holders of Preferred Stock, or any series thereof, and any such new series may have powers, preferences and rights, including, without limitation, voting rights, dividend rights, liquidation rights, redemption rights and conversion rights, senior to, junior to or pari passu with the rights of the Common Stock, the Preferred Stock, or any future class or series of Preferred Stock or Common Stock.

ARTICLE 5

A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for (i) liability based on a breach of the duty of loyalty to the Corporation or its stockholders; (ii) liability for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; (iii) liability based on the payment of an improper dividend or an improper repurchase of the Corporation’s stock under Section 174 of the General Corporation Law of the State of Delaware; or (iv) liability for any transaction for which the director derived an improper personal benefit. If the General Corporation Law of the State of Delaware is hereafter amended to authorize the further elimination or limitation of the liability of directors, then the liability of a director of the Corporation in addition to the limitation on personal liability provided herein, shall be limited to the fullest extent permitted by the amended General Corporation Law of the State of Delaware. Any repeal or modification of this Article by the stockholders of the Corporation shall be prospective only and shall not adversely affect any limitation on the personal liability of a director of the Corporation existing at the time of such repeal or modification.

ARTICLE 6

The power to adopt, amend, or repeal the Bylaws of this Corporation is hereby conferred upon the Board of Directors to the full extent permitted by law, subject, however, to the power of the stockholders of this Corporation to adopt, amend, or repeal Bylaws.

ARTICLE 7

Election of directors need not be by written ballot unless the Bylaws of this Corporation shall so provide.

THIRD: This Fifth Amendment and Restated Certificate of Incorporation has been duly adopted in accordance with the provisions of Sections 242 and 245 of the General Corporation Law of the State of Delaware, with notice to nonconsenting stockholders having been given in accordance with Section 228(d) of the General Corporation Law of the State of Delaware.

IN WITNESS WHEREOF, Zamba Corporation has caused this Fifth Amended and Restated Certificate of Incorporation to be signed by its Chief Executive Officer and attested to by its Secretary in Minneapolis, Minnesota this 3^rd day of August, 2001.

	ZAMBA CORPORATION


	By:	/s/	Doug Holden
			Doug Holden, Chief Executive Officer
ATTEST:


/s/ Ian Nemerov
Ian Nemerov, Secretary

Exhibit 10.06

Silicon Valley Bank

ZAMBA CORPORATION