-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QffD0M2YIPoD7PYmsYchtgQvha/G/nM+jFuD2N+TwVsaa946ey8KANTxEqNq1j2Q zT/Z0LKCN7DC2a6v7NQJUQ== 0000904456-99-000081.txt : 20040402 0000904456-99-000081.hdr.sgml : 20040402 19990816124700 ACCESSION NUMBER: 0000904456-99-000081 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 DATE AS OF CHANGE: 20030331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ZMAX CORP CENTRAL INDEX KEY: 0001034760 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 522040275 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-55993 FILM NUMBER: 99691244 BUSINESS ADDRESS: STREET 1: 20251 CENTURY BOULEVARD STREET 2: SUITE 333 CITY: GERMANTOWN STATE: MD ZIP: 20874 BUSINESS PHONE: 3013539500 MAIL ADDRESS: STREET 1: 20251 CENTURY BLVD CITY: GERMANTOWN STATE: MD ZIP: 20874 FORMER COMPANY: FORMER CONFORMED NAME: ZMAX CORP DATE OF NAME CHANGE: 19970530 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended JUNE 30, 1999 ------------- OR [ ] 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 000-23967 ZMAX CORPORATION ------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 52-2040275 ------------------------------------------------------------------------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 20251 CENTURY BLVD. GERMANTOWN, MD 20874 ------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (301) 353-9500 -------------- ------------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report. Indicate by check 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 [X] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of August 2, 1999; 12,949,913 shares of common stock, $.001 par value per share. ZMAX CORPORATION INDEX Page No. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - June 30, 1999 (unaudited) and December 31, 1998 1 Consolidated Statements of Operations for the three and six months ended June 30, 1999 and 1998 (unaudited) 2 Consolidated Statements of Cash Flows for the three and six months ended June 30, 1999 and 1998 (unaudited) 3 Notes to Consolidated Financial Statements 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosures About Market Risk 15 Item 4. Submission of Matters to a Vote of Security Holders 15 PART II. OTHER INFORMATION Item 5. Exhibits and Reports on Form 8-K 16 SIGNATURES 17 PART 1. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ZMAX CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
June 30, December 31, 1999 1998 ------------- ------------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 4,242,489 $ 4,521,126 Accounts receivable, net 4,605,506 2,545,659 Prepaid expenses and other assets 308,383 127,952 ------------- ------------- Total current assets 9,156,378 7,194,737 Property and equipment, net 598,791 477,870 Intangible assets, net 8,886,654 9,740,217 Other assets 85,582 33,538 ------------- ------------- Total assets $ 18,727,405 $ 17,446,362 ============= ============= LIABILITIES & SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 2,107,810 $ 1,596,074 Current portion of capital lease obligation 33,832 35,519 ------------- ------------- Total current liabilities $ 2,141,642 $ 1,631,593 Long-term capital lease obligation, net of current portion 53,602 34,716 ------------- ------------- Total liabilities 2,195,244 1,666,309 Commitments and contingencies (Note 4) Shareholders' equity Preferred stock, $0.001 par value, 10,000,000 shares authorized, none issued and outstanding - - Common stock, $0.001 par value, 50,000,000 shares authorized, 12,949,913 and 13,117,214 shares issued and outstanding as of June 30, 1999 and December 31, 1998, respectively, none and 167,301 shares subject to cancellation agreements as of June 30, 1999 and December 31, 1998, respectively 13,117 13,117 Additional paid-in capital 41,763,101 41,763,101 Accumulated deficit (25,244,057) (25,996,165) ------------- ------------- Total shareholders' equity 16,532,161 15,780,053 Total liabilities & shareholders' equity $ 18,727,405 $ 17,446,362 ============= =============
The accompanying notes are an integral part of these balance sheets. 1 ZMAX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Six Months Ended June 30 Ended June 30 --------------------------- -------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ----------- (unaudited) (unaudited) Revenues: Professional services $ 6,376,516 $ 2,502,779 $ 11,291,378 $ 4,027,103 Software 702,215 - 893,998 - ------------- ------------- ------------- ------------- Total revenues 7,078,731 2,502,779 12,185,376 4,027,103 Operating expenses: Cost of sales - Professional services 2,744,862 843,015 5,167,508 1,309,823 Cost of sales - Software 19,808 - 39,733 - Research and development 112.255 83,935 280,170 211,622 Sales and marketing 670,346 276,037 1,217,326 541,546 General and administrative 2,142,846 853,527 3,968,420 1,910,632 Depreciation and amortization 414,294 304,239 821,202 625,881 Income (loss) from operations 974,320 142,026 691,017 (572,401) Other income (expenses): Interest income 31,315 87,121 68,578 142,552 Interest expense (2,387) 8,845 (4,497) 1,990 Other (131) (3,987) (2,990) (19,867) ------------- ------------- ------------- ------------- Net income (loss) $ 1,003,117 $ 234,005 $ 752,108 $ (447,726) ============= ============= ============= ============= Basic net income (loss) per share $ 0.08 $ 0.02 $ 0.06 $ (0.05) ============= ============= ============= ============= Basic weighted average shares outstanding 12,949,913 11,249,913 12,949,913 9,849,913 ============= ============= ============= ============= Diluted net income (loss) per share $ 0.08 $ 0.02 $ 0.06 $ (0.05) ============= ============= ============= ============= Diluted weighted average shares outstanding 12,972,653 11,488,002 13,034,804 9,849,913 ============= ============= ============= =============
The accompanying notes are an integral part of these statements. 2 ZMAX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Six Months Ended June 30 Ended June 30 --------------------------- -------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ----------- (unaudited) (unaudited) Cash flows from operating activities: Net income (loss) $ 1,003,117 $ 234,005 $ 752,108 $ (447,726) Adjustments to reconcile loss to net cash Depreciation and amortization expense 429,146 304,239 844,873 625,881 Changes in assets and liabilities Accounts receivable (1,337,302) (1,091,327) (2,059,847) (1,431,379) Prepaid expenses and other assets (83,660) (67,951) (232,475) (48,004) Accounts payable and accrued expenses 470,532 201,555 511,736 359,586 Customer deposits - (204,478) - (222,968) ------------- ------------- ------------- ------------- Net cash provided by (used in) operating activities 481,833 (623,957) (183,605) (1,164,610) ------------- ------------- ------------- ------------- Net cash used in investing activities: Purchases of property and equipment (31,156) (20,565) (112,231) (74,945) ------------- ------------- ------------- ------------- Net cash used in investing activities (31,156) (20,565) (112,231) (74,945) ------------- ------------- ------------- ------------- Net cash provided by (used in) financing activities Net borrowings (payments) on long-term obligations 25,740 (274,193) 17,199 (539,541) ------------- ------------- ------------- ------------- Net cash (used in) provided by financing activities 25,740 (274,193) 17,199 (539,541) ------------- ------------- ------------- ------------- Net increase (decrease) in cash 476,417 (918,715) (278,637) (1,779,096) ------------- ------------- ------------- ------------- Cash, beginning of period 3,766,072 5,544,703 4,521,126 6,405,084 ------------- ------------- ------------- ------------- Cash, end of period $ 4,242,489 $ 4,625,988 $ 4,242,489 $ 4,625,988 ============= ============= ============= =============
The accompanying notes are an integral part of these statements. 3 ZMAX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION, ORGANIZATION, AND NATURE OF OPERATIONS: BASIS OF PRESENTATION The accompanying unaudited financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. These financial statements should be read in conjunction with the financial statements of ZMAX Corporation ("ZMAX" or the "Company"), as of December 31, 1998, and the notes thereto included in the Annual Report on Form 10-K filed by the Company. The results of operations for the three and six months ended June 30, 1999, are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. NATURE OF OPERATIONS On November 6, 1996, ZMAX Corporation ("ZMAX" or the "Company"), which was then a shell company listed on the OTC Bulletin Board, acquired 100% of the outstanding common stock of Century Services, Inc. ("CSI"), a Maryland corporation. CSI was a privately held company formed on December 13, 1995, to perform computer re-engineering with a focus on providing a solution to the Year 2000 problem. For financial reporting purposes, this acquisition was treated as a recapitalization of CSI with CSI as the acquirer (a reverse acquisition). Accordingly, the historical financial statements of ZMAX prior to November 6, 1996, are the historical financial statements of CSI. The accompanying consolidated financial statements include all of the accounts of CSI and the accounts of ZMAX since the acquisition on November 6, 1996. On December 14, 1998, ZMAX acquired Eclipse Information Systems, Inc. (" Eclipse"). The accompanying consolidated financial statements include the accounts of Eclipse since the date of acquisition. All significant inter-company amounts have been eliminated. During 1998, the Company's revenue was derived primarily from Year 2000 services. The Company also began licensing a Year 2000 software tool during 1998; however, such licensing revenue was not significant in 1998. In December 1998, the Company expanded its operations through the acquisition of Eclipse. Eclipse performs management and information systems consulting services. Eclipse also resells certain hardware and software products to its customers. While the Company's revenue in 1998 was primarily derived from its Year 2000 or "millennium" services there can be no assurance that the Company will be successful in diversifying through acquisitions and developing additional post-Year 2000 services. Further, the failure of the Company's Year 2000 4 methodology and tools to function properly or the existence of significant errors or problems following completion of millennium conversions or other associated Year 2000 work performed by the Company could necessitate significant expenditures by the Company to remedy the problem. The consequences of failures, errors or problems could materially and adversely affect the Company's business, operating results and financial condition. The Company's operations are subject to certain risks and uncertainties, including among others, rapidly changing technology, uncertain markets for millennium services, current and potential competitors with greater financial, technological, production and marketing resources, reliance on certain significant customers, the need to develop additional products and services, limited protection of proprietary information, the risk of third party claims of infringement, potential contract liability related to the Company's access to key aspects of customers computer systems, dependence upon strategic alliances, the need for additional technical personnel, dependence on key management personnel, management of growth, uncertainty of future profitability and possible fluctuations in financial results. The Company may also require additional capital that may not be available to it. In addition, there are risks associated with the market activity in ZMAX common stock. 2. SIGNIFICANT ACCOUNTING POLICIES: CASH AND CASH EQUIVALENTS Investments with original maturities of three months or less are considered cash equivalents for the purpose of these financial statements. REVENUE RECOGNITION Revenues on time-and-materials contracts are recognized based upon hours incurred at contract rates plus direct costs. Revenues on fixed-price contracts are recognized on the percentage-of-completion method based on costs incurred in relation to total estimated costs. Anticipated losses are recognized as soon as they become known. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Unbilled accounts receivable on time-and-materials contracts represent costs incurred and gross profit recognized during the period presented but not billed until the following period. Unbilled accounts receivable on fixed-price contracts consists of amounts incurred that are not yet billable under contract terms. At June 30, 1999 and December 31, 1998, unbilled accounts receivable totaled approximately $1,040,284 and $410,178, respectively. Revenue from the sale of perpetual and term software licenses is recognized at the time of delivery and acceptance of software products by the customer, provided that collection is probable. Maintenance revenue that is bundled with an initial license fee is deferred and recognized ratably over the maintenance period. Amounts deferred for maintenance are based on the fair value of equivalent maintenance services sold separately. The American Institute of Certified Public Accountants issued Statement of Position 97-2 5 "Software Revenue Recognition" ("SOP 97-2"), which superceded Statement of Position 91-1 "Software Revenue Recognition." SOP 97-2 provides additional guidance with respect to multiple element arrangements; returns, exchanges, and platform transfer rights; resellers; services; funded software development arrangements; and contract accounting. The Company recognizes revenue in accordance with SOP 97-2 and Statement of Position 98- 9, "Modification of SOP 97-2. Software Revenue Recognition. With Respect to Certain Transitions". Prior to 1998, the Company had no revenue from the license of software. For the three and six months ended June 30, 1999 software revenues were, $702,215 and $893,998, respectively. SIGNIFICANT CUSTOMERS For the three months ended June 30, 1999, two customers individually represented 16% and 12% of revenue. For three months ended June 30, 1998, three customers individually represented 31%, 18% and 14% of revenue, respectively. For the six months ended June 30, 1999, two customers individually represented 14% and 10% of revenue, respectively. Due to the nature of the Company's business and the relative size of certain contracts, the loss of any single significant customer could have a material adverse effect on the Company's results of operations. CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially subject the Company to credit risk consist of cash and cash equivalents and accounts receivable. Accounts receivable includes amounts due from relatively large companies in a variety of industries. As of June 30, 1999, one customer individually represented 12% of accounts receivable. As of December 31, 1998, two customers individually represented 16% and 13% of accounts receivable. INCOME TAXES The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." Under SFAS No. 109, deferred tax assets and liabilities are computed based on the difference between the financial statement and income tax bases of assets and liabilities using the enacted marginal tax rate. SFAS No. 109 requires that the net deferred tax asset be reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the net deferred tax asset will not be realized. BASIC AND DILUTED NET GAIN PER SHARE Basic income or loss per share includes no dilution and is computed by dividing net income or loss by the weighted average number of common shares outstanding for the period. Diluted income or loss per share includes the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Outstanding shares subject to cancellation agreements have not been included in either the basic or diluted calculation. The calculation of the basic and diluted weighted average shares is shown below: 6 ZMAX CORPORATION AND SUBSIDIARY CALCULATION OF BASIC AND DILUTED NET INCOME (LOSS) PER SHARE (UNAUDITED)
Three Months Six Months Ended June 30 Ended June 30 --------------------------- -------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ----------- (unaudited) (unaudited) WEIGHTED AVERAGE SHARE CALCULATIONS Weighted average shares of common stock Outstanding 12,977,797 11,729,714 13,047,505 10,329,714 Less: Average number of cancelable shares common stock outstanding (27,884) (479,801) (97,592) (479,801) ------------- ------------- ------------- ------------- Basic weighted average shares outstanding 12,949,913 11,249,913 12,949,913 9,849,913 Treasury stock effect of options and warrants 22,740 238,089 84,891 - Diluted weighted average shares outstanding: 12,972,653 11,488,002 13,034,804 9,849,913 ============= ============= ============= =============
NEW ACCOUNTING PRONOUNCEMENTS The Company has adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. The adoption of SFAS No. 131 has had no impact on the Company's results of operations, financial position or cash flows. In March 1998, the AICPA issued Statement of Position 98-1 "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use", ("SOP 98-1"). SOP 98-1 requires the Company to capitalize internal computer software costs once the capitalization criteria of the SOP are met. SOP 98-1 is effective January 1, 1999, and is applied to all projects in progress upon the initial application of the SOP. The adoption of SOP 98-1 has not had a material impact on the Company's results of operations, financial position, or cash flows. 7 3. STOCK SUBJECT TO CANCELLATION In September 1995, ZMAX entered into stock cancellation agreements with certain stockholders that provided for the cancellation of 775,808 shares of ZMAX common stock. In March 1997, 296,007 of these shares were returned to the Company and canceled. An additional 312,500 shares were returned to the Company and canceled in December 1998. The remaining 167,301 were returned to the Company and canceled in April 1999. 4. COMMITMENTS AND CONTINGENCIES: LITIGATION The Company is periodically a party to disputes arising from normal business activities. In the opinion of management, resolution of these matters will not have a material adverse effect upon the financial position or future operating results of the Company, and adequate provision for any potential losses has been made in the accompanying financial statements. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of the financial condition and results of operations of the Company should be read in conjunction with the financial statements and the notes thereto which appear elsewhere in this quarterly report and the Company's Annual Report on Form 10-K for the year ended December 31, 1998. OVERVIEW ZMAX Corporation ("ZMAX" or the "Company") focuses on acquiring, building and operating companies in the information technology ("IT") industry. In 1996, the Company acquired all of the stock of Century Services, Inc. ("CSI"). In December 1998, the Company acquired all of the stock of Eclipse Information Systems, Inc. ("Eclipse"). On December 14, 1998 ZMAX acquired all of the outstanding capital stock of Eclipse. The results of operations of Eclipse are included in the financial statements of ZMAX from the date of acquisition. Eclipse markets IT consulting services to a variety of commercial companies through a series of technology practices that specialize in delivering solutions focused in distributed client server environments. Eclipse provides services in ERP packaged solutions, internet & intranet solutions, network solutions, client server solutions, and AS/400 solutions. On November 6, 1996, ZMAX acquired all of the outstanding stock of CSI. Prior to this transaction, ZMAX had no operations and its activities consisted of efforts to establish or acquire a new business and to raise capital. CSI was a privately held company formed on December 13, 1995 which specializes in assisting business organizations and government agencies with what has become popularly known as the "Year 2000" problem ("Y2K"). For financial reporting purposes, the acquisition was treated as a recapitalization of CSI with CSI as the acquirer (a reverse acquisition). CSI markets Y2K services to a variety of commercial and government organizations. The Company believes some demand for CSI's Y2K services may continue to exist after the Year 2000, although this demand will diminish significantly over time and will eventually disappear. However, CSI's proprietary computer software tools may be used in conversion projects unrelated to Y2K work. CSI plans to pursue business opportunities unrelated to the Y2K problem in the information services market and to develop products and services to take advantage of these opportunities, such as migrating a client's software application from a mainframe to a client-server environment. With the recent acquisition of Eclipse, the Company believes synergistic benefits may be realized as the two organizations further develop additional services and technologies together. Through December 31, 1998, the Company's revenues were generated primarily from CSI's consulting and conversion fees and software sales related to Y2K services. With the acquisition of Eclipse and its plans to continue to 9 diversify, the Company's future revenues will be less concentrated on Y2K products. In the next 12 months, the Company intends to continue to integrate the services of Eclipse's with that of CSI's and other potentially synergistic acquisitions. Further, the Company intends to expand the services of both subsidiaries through the opening of other offices in key geographic markets. In the six months ended June 30, 1999 the Company opened new offices in Minneapolis, Detroit, and Boston and performed initial analysis on several other cities. The Company also intends to make additional investments in the expansion and further development of additional IT services and markets. In view of these investments the Company believes the period-to-period comparisons of its financial results are not necessarily meaningful and should not be relied upon as an indication of future performance. Specifically, as the Company increases its investments in non-Y2K services, it will incur training, salary and other costs prior to the recognition of related revenues. In addition, a large percentage of the Company's revenues are expected to be derived from a relatively small number of large-scale, comprehensive projects. Consequently, the Company's revenues and operating results may be subject to substantial fluctuations in any given year and from quarter to quarter. RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 30, 1999 COMPARED TO THE QUARTER ENDED JUNE 30, 1998 REVENUES. Revenues for the quarter ended June 30, 1999, were approximately $7,079,000, an increase of approximately $4,576,000 over revenues of approximately $2,503,000 for the quarter ended June 30, 1998. The increase in revenues during the second quarter of 1999 was a result of increased sales activity of Y2K services as compared to 1998, revenues generated from the licensing of the Company's proprietary software tool during the second quarter of 1999, and additional IT consulting revenues generated from the Company's acquisition of Eclipse in December 1998. For the quarter ended June 30, 1999, Y2K services represented 55% of revenues as compared to 100% for Year 2000 services for the quarter ended June 30, 1998. The remaining revenues for the quarter ended June 30, 1999 relate to IT consulting services and software sales. GROSS PROFIT. Gross profit for the quarter ended June 30, 1999, was approximately $4,314,000, or 61% of revenues, an increase of approximately $2,654,000 over gross profit of approximately $1,660,000, or 67% of revenues, for the quarter ended June 30, 1998. The increase in gross profitability during the quarter ended June 30, 1999, was a result of increased revenues; however, the decrease in gross profit as a percentage of revenue is a result of increased IT consulting work as part of the Eclipse acquisition. IT consulting typically has lower margins than Y2K services. RESEARCH AND DEVELOPMENT. Research and development expenses for the quarter ended June 30, 1999, were approximately $112,000, or 2% of revenues, an increase of approximately $28,000, from approximately $84,000, or 3% of revenues, for the quarter ended June 30, 1998. The Company initiated efforts in the fourth quarter of 1998 to market a validation and verification toolset that the Company developed using aspects of the Company's VISION 2000TM 10 toolsuite. The Company continues to incur research and development expenses as it modifies, enhances, and updates this tool. SALES AND MARKETING. Sales and marketing expenses for the quarter ended June 30, 1999, were approximately $670,000, or 10% of revenues, an increase of approximately $394,000, from approximately $276,000 of such expenses, or 11% of revenues, for the quarter ended June 30, 1998. The increase in sales and marketing expenses for the second quarter of 1999 was primarily attributable to the acquisition of Eclipse, commission expenses related to increased sales revenue, and further investments in marketing efforts related to the Company's services. GENERAL AND ADMINISTRATIVE. General and administrative expenses for the quarter ended June 30, 1999, were approximately $2,143,000, or 30% of revenues, an increase of approximately $1,289,000, as compared to approximately $854,000 of such expenses, or 34% of revenues, incurred by the Company for the quarter ended June 30, 1998. The increase in general and administrative expenses for the quarter ended June 30, 1999 was primarily attributable to general and administrative expenses associated with the on-going operations of Eclipse and the costs associated with the opening of the Minneapolis, Boston, and Detroit offices. The Company anticipates additional investments will be made as it expands its presence throughout the United States with new offices and acquisitions. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense for the quarter ended June 30, 1999, was approximately $414,000, or 6% of revenues, an increase of approximately $110,000, as compared to approximately $304,000 of such expenses, or 12% of revenues, incurred by the Company for the quarter ended June 30, 1998. The increase in depreciation and amortization expense for the three months ended 1999 was primarily attributable to an increase in depreciable assets and intangibles associated with the acquisition of Eclipse. OTHER INCOME. Interest income for the quarter ended June 30, 1999, was approximately $31,000, or 1% of revenues, a decrease of approximately $56,000 as compared to approximately $87,000, or 3% of revenues, for the quarter ended June 30, 1998. The decrease in interest income for the quarter ended June 30, 1999 was primarily attributable to lesser amounts of cash available for investment during 1999. EBITDA (EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION, AND AMORTIZATION) As a result of the above, EBITDA for the quarter ended June 30, 1999 was approximately $1,388,000. This represented an increase of approximately $942,000 as compared to EBITDA of approximately $446,000 for the quarter ending June 30, 1998. NET INCOME. As a result of the above, net income for the quarter ended June 30, 1999, was approximately $1,003,000, or 14% of revenues, an increase of approximately $769,000, as compared to net income of approximately $234,000, or 9% of revenues, for the quarter ended June 30, 1998. 11 FOR THE SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1998 REVENUES. Revenues for the six months ended June 30, 1999, were approximately $12,185,000, an increase of approximately $8,158,000 over revenues of approximately $4,027,000 for the six months ended June 30, 1998. The increase in revenues during the first half of 1999 was a result of increased sales activity of Y2K services as compared to 1998, revenues generated from the licensing of the Company's proprietary software tool during the first half of 1999, and additional IT consulting revenues generated from the Company's acquisition of Eclipse in December 1998. For the six months ended June 30, 1999, Y2K services represented 50% of revenues as compared to 100% for the six months ended June 30, 1998. The remaining revenues for the six months ended June 30, 1999 were related to IT consulting services. GROSS PROFIT. Gross profit for the six months ended June 30, 1999, was approximately $6,978,000, or 57% of revenues, an increase of approximately $4,261,000 over gross profit of approximately $2,717,000, or 67% of revenues, for the six months ended June 30, 1998. The increase in gross profit during the six months ended June 30, 1999, was a result of increased revenues; however, the decrease in gross profit as a percentage of revenue is a result of increased IT consulting work as part of the Eclipse acquisition. IT consulting typically has lower margins than Y2K services. RESEARCH AND DEVELOPMENT. Research and development expenses for the six months ended June 30, 1999, were approximately $280,000, or 2% of revenues. Research and development expenses for the six months ended June 30, 1998, were approximately $212,000, or 5% of revenues. The Company initiated efforts in the fourth quarter of 1998 to market a validation and verification toolset that the Company developed using aspects of the Company's VISION 2000TM toolsuite. The Company continues to incur research and development expenses as it modifies, enhances, and updates this tool. SALES AND MARKETING. Sales and marketing expenses for the six months ended June 30, 1999, were approximately $1,217,000, or 10% of revenues, an increase of approximately $675,000, from approximately $542,000 of such expenses, or 13% of revenues, for the six months ended June 30, 1998. The increase in sales and marketing expenses for the first half of 1999 was primarily attributable to the acquisition of Eclipse, commission expenses related to increased sales revenue, and further investments in marketing efforts related to the Company's services. GENERAL AND ADMINISTRATIVE. General and administrative expenses for the six months ended June 30, 1999, were approximately $3,968,000, or 33% of revenues, an increase of approximately $2,058,000, as compared to approximately $1,911,000 of such expenses, or 47% of revenues, incurred by the Company for the six months ended June 30, 1998. The increase in general and administrative expenses for the six months ended 1999 was primarily attributable to general and administrative expenses associated with the on-going operations of Eclipse and the costs associated with the opening of the Minneapolis, Boston, and Detroit offices. The Company anticipates additional investments will be made as it expands its presence throughout the United States with new offices and acquisitions. 12 DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses for the six months ended June 30, 1999, was approximately $821,000, or 7% of revenues, an increase of approximately $195,000, as compared to approximately $626,000 of such expenses, or 16% of revenues, incurred by the Company for the six months ended June 30, 1998. The increase in depreciation and amortization expenses for the six months ended 1999 was primarily attributable to an increase in depreciable assets and intangibles associated with the acquisition of Eclipse. OTHER INCOME. Interest income for the six months ended June 30, 1999, was approximately $69,000, or 1% of revenues, a decrease of approximately $74,000 as compared to approximately $143,000, or 4% of revenues, for the six months ended June 30, 1998. The decrease in interest income for the six months ended June 30, 1999 was primarily attributable to lesser amounts of cash available for investment during 1999. EBITDA (EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION, AND AMORTIZATION) As a result of the above, EBITDA for the six months ended June 30, 1999 was approximately $1,512,000. This represented an increase of approximately $1,458,000 as compared to EBITDA of approximately $54,000 for the six months ending June 30, 1998. NET INCOME. As a result of the above, net income for the six months ended June 30, 1999, was approximately $752,000, or 6% of revenues, an increase of approximately $1,200,000, as compared to the net loss of approximately $448,000, or 11% of revenues, for the six months ended June 30, 1998. LIQUIDITY AND CAPITAL RESOURCES The Company has, since its inception, financed its operations and capital expenditures through the sale of stock, convertible notes, convertible exchangeable debentures and the proceeds from the exchange offer and exercise of the warrants related to the convertible exchangeable debentures. Cash generated in operations during the quarter ended June 30, 1999, was approximately $482,000, as compared to approximately $(624,000) cash used in operations for the quarter ended June 30, 1998. Capital expenditures were approximately $31,000 for the quarter ended June 30, 1999, as compared to approximately $21,000 during the quarter ended June 30, 1998. The increase in capital expenditures during 1998 is related primarily to the ongoing purchase requirements of computer equipment for Company personnel and expenditures relating to new offices and infrastructure improvement projects. As of June 30, 1999, the Company had working capital of approximately $7,014,000. The Company's primary source of liquidity consists of approximately $4,242,000 in cash and cash equivalents and approximately $4,606,000 of accounts receivable. The market for the Company's products is expanding and the Company's business environment is characterized by rapid technological changes. The Company requires substantial working capital to fund its business, particularly to finance accounts receivable, sales and marketing efforts, 13 research and development, and capital expenditures. The Company currently has no commitments for capital expenditures. The Company's future capital requirements will depend on many factors including the rate of revenue growth, if any, the timing and extent of spending to support research and development, technological changes and market acceptance of the Company's services. The Company believes that its current cash position is sufficient to meet its capital expenditure and working capital requirements for the near term; however, the growth and technological change make it difficult for the Company to predict future liquidity requirements with certainty. Over the longer term, the Company must successfully execute its plans to generate significant positive cash flows if it is to sustain adequate liquidity without impairing growth or requiring the infusion of additional funds from external sources. Additionally, a major expansion, such as would occur with the acquisition of a major new subsidiary, might also require external financing that could include additional debt or equity capital. There can be no assurance that additional financing, if required, will be available on acceptable terms, if at all. OTHER Inflation has not had a significant effect on the Company's operations, as increased costs to the Company have generally been offset by increased prices of products and services sold. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company is an information technology ("IT") corporation which is in the business of performing evaluation, testing and re-engineering services in providing solutions to the Year 2000 problem. The Company owns, markets, utilizes and licenses the use by others of its proprietary Year 2000 software re-engineering tools and methodologies. The Company's management believes that its operating and information systems are Year 2000 compliant. The Company expects no material impact on its operating and information systems from the Year 2000 issue. This report contains forward-looking statements setting forth the Company's beliefs or expectations relating to future revenues and profitability. Actual results may differ materially from projected or expected results due to changes in the demand for the Company's products and services, uncertainties relating to the results of operations, dependence on its major customers, risks associated with rapid technological change, potential fluctuations in quarterly results, its dependence on key employees and other risks and uncertainties affecting the technology industry generally. The Company disclaims any intent or obligation to up-date publicly these forward-looking statements, whether as a result of new information, future events or otherwise. Most of the Company's current cost structure is fixed. Expenses consist primarily of the salaries and benefits paid to the Company's technical, marketing and administrative personnel. Amortization and depreciation expenses 14 relate to property, equipment and intangible assets. As a result of its plan to expand its operations through internal growth and acquisitions the Company expects these costs to increase in absolute dollars, while decreasing as a percentage of revenue. The Company's profitability depends upon both the volume of revenues from professional and consulting services and software sales and the Company's ability to manage costs. Because a significant portion of the Company's cost structure is fixed, the Company must effectively manage these costs to achieve profitability. In addition, certain of the Company's projects are priced on a fixed fee basis. The profitability on an individual fixed fee project depends upon the completion of the project within the budgeted number of staff hours and within the agreed upon time frame. To date, the Company has been able to maintain its operating margins through efficiencies achieved by the use of the Company's proprietary software tools, by completing fixed fee projects within budget, and by effectively managing general overhead costs. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK NOT APPLICABLE 15 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS The Company's Annual Meeting of Stockholders was held on May 21, 1999. The following three persons were elected by the following votes to serve as Class II directors of the Board of Directors for three years or until their successors are elected and qualified: Name Votes For Votes Withheld ---- --------- -------------- Steve L. Komar 6,755,740 52,985 James T. McCubbin 6,755,740 52,985 Stockholders approved the increase in the number of shares of Common Stock of the Company for issuance under the Company's 1997 Incentive Stock Option Plan by 1,300,000 shares from a prior total of 1,700,000 shares to a new total of 3,000,000 shares. Such proposal was approved by a vote of 4,636,295 shares for and 193,786 shares against, with 6,875 shares abstaining. Stockholders ratified the selection of Arthur Anderson LLP as the independent accountants for the Company for the current fiscal year. Such proposal was approved by a vote of 6,804,280 shares for and 2,445 shares against, with 2,000 shares abstaining. ITEM 5. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS The following exhibit is filed herewith: 27 - Financial Data Schedule (b) REPORTS ON FORM 8-K NONE 16 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. ZMAX Corporation Date: August 11, 1999 /s/MICHAEL C. HIGGINS --------------------- Michael C. Higgins President /s/JAMES T. MCCUBBIN -------------------- James T. McCubbin Vice President - Principal Financial and Accounting Officer EX-27 2
5 0001040257 ZMAX CORPORATION 3-MOS DEC-31-1999 APR-01-1999 JUN-30-1999 4,242,489 0 4,622,666 17,160 308,383 9,156,978 935,054 336,263 18,727,405 2,141,642 0 0 0 13,117 16,519,044 18,727,405 7,078,731 7,078,731 2,764,670 2,764,670 3,339,741 0 (28,797) 1,003,117 0 1,003,117 0 0 0 1,003,117 0.08 0.08
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