<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 23, 1997
REGISTRATION STATEMENT NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
ZMAX CORPORATION
(EXACT NAME OF CO-REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA 666 87-0434977
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
--------------
NEW ZMAX CORPORATION
(EXACT NAME OF CO-REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 666 52-2040275
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
--------------
20251 CENTURY BOULEVARD
GERMANTOWN, MARYLAND 20874
(301) 353-9500
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
BOTH CO-REGISTRANTS' PRINCIPAL EXECUTIVE OFFICES)
--------------
MICHAEL C. HIGGINS
PRESIDENT
20251 CENTURY BOULEVARD
GERMANTOWN, MARYLAND 20874
(301) 353-9500
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE
OF BOTH CO-REGISTRANTS' AGENT FOR SERVICE)
--------------
COPIES TO:
RICHARD H. MILLER MICHAEL H. CHANIN
POWELL, GOLDSTEIN, FRAZER & POWELL, GOLDSTEIN, FRAZER &
MURPHY LLP MURPHY LLP
SIXTEENTH FLOOR SIXTH FLOOR SOUTH
191 PEACHTREE STREET, NE 1001 PENNSYLVANIA AVENUE, NW
ATLANTA, GEORGIA 30303 WASHINGTON, DC 20004
(404) 572-6600 (202) 347-0066
--------------
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after the effective date of this Registration
Statement.
--------------
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
--------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===============================================================================================================
PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PRICE PER SHARE(1) OFFERING PRICE(1) FEE(1)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
New ZMAX Common Stock, $ 0.001 par value(2)... 11,870,514 $13.75 $163,219,567.60 $49,460.48
- ---------------------------------------------------------------------------------------------------------------
Old ZMAX Common Stock, $ 0.001 par value(3)... 2,420,000 N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------
Old ZMAX Warrants(4).......................... 1,210,000 N/A N/A N/A
===============================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee for
this filing based upon the average of the closing bid and asked prices of
Old ZMAX Common Stock (defined below) as reported on the OTC Bulletin
Board, a service provided by Nasdaq Stock Market, Inc., for June 17, 1997.
(2) Represents the maximum number of shares of Common Stock, $ 0.001 par
value, of New ZMAX Corporation ("New ZMAX Common Stock") issuable to
stockholders of ZMAX Corporation ("Old ZMAX") upon consummation of the
merger of Old ZMAX with and into New ZMAX Corporation (the "Merger") based
on an exchange ratio of one share of New ZMAX Common Stock for each share
of Common Stock, $0.001 par value, of Old ZMAX ("Old ZMAX Common Stock").
The number of shares of New ZMAX Common Stock registered by this filing
and the registration fee paid with respect thereto includes all New ZMAX
Common Stock issued in the Merger and, therefore, includes New ZMAX Common
Stock issued in respect of the Old ZMAX Common Stock issued in exchange
for all of the Old ZMAX Debentures (defined below) in the Exchange Offer
described herein and the full exercise of all of the Warrants defined
herein registered hereby. Accordingly, no additional fee is required with
respect to the Debentures and the Warrants.
(3) Represents the maximum number of shares of Old ZMAX Common Stock issuable
to holders of Old ZMAX 8% Convertible Exchangeable Subordinated Debentures
due 1999 (the "Debentures") upon the exchange of the Debentures in the
Exchange Offer described herein. The number of shares of Old ZMAX Common
Stock to be registered also includes the maximum number of shares of Old
ZMAX Common Stock issuable upon the exercise of Warrants to purchase Old
ZMAX Common Stock, which Warrants will be issued to the holders of the
Debentures in the Exchange Offer described herein.
(4) Represents the maximum number of Warrants to purchase Old Zmax Common
Stock issuable to holders of Debentures in the Exchange Offer described
herein.
================================================================================
<PAGE>
[LOGO OF ZMAX CORPORATION
ZMAX CORPORATION 20251 CENTURY BOULEVARD
APPEARS HERE] GERMANTOWN, MARYLAND 20874
To the Stockholders of
ZMAX Corporation:
You are cordially invited to attend the 1997 Annual Meeting of Stockholders
of ZMAX Corporation, a Nevada corporation ("Old ZMAX"), to be held at
[location to be determined] on September , 1997, at 11:00 A.M., local time. A
Notice of Annual Meeting, a Proxy Statement/Prospectus and a Proxy containing
information about the matters to be acted upon at the Annual Meeting are
enclosed.
At the Annual Meeting you will be asked to (i) elect nominees to serve as
directors of Old ZMAX until the next annual meeting of stockholders, (ii)
approve the ZMAX Corporation 1997 Stock Incentive Plan and (iii) consider and
vote upon a proposal to adopt an Agreement and Plan of Merger, dated as of
June 10, 1997 (the "Merger Agreement"), between Old ZMAX and New ZMAX
Corporation, a Delaware corporation ("New ZMAX"), pursuant to which Old ZMAX
will be merged with and into New ZMAX (the "Merger"). If the Merger Agreement
is approved and the Merger becomes effective, each holder of Common Stock,
$0.001 par value, of Old ZMAX ("Old ZMAX Common Stock") will have the right to
receive, and such shares of Old ZMAX Common Stock will become exchangeable
for, one share of Common Stock, $0.001 par value, of New ZMAX for each share
of Old ZMAX Common Stock held at the time of the Merger.
The Board of Directors of Old ZMAX has fixed August , 1997 as the record
date for the determination of stockholders entitled to notice of and to vote
at the Annual Meeting. Stockholders are urged to review carefully the
information contained in the accompanying Proxy Statement/Prospectus,
including in particular the information under the captions "Risk Factors" and
"The Merger" prior to making any voting decision in connection with their Old
ZMAX Common Stock.
It is very important that your views be represented whether or not you are
able to attend the Annual Meeting. Accordingly, please complete, sign and date
your proxy card and return it to us in the enclosed envelope as soon as
possible. Failure to return your proxy card or to vote in person at the Annual
Meeting will have the effect of a vote against the Merger. Returning your
completed proxy card will not limit your right to vote in person if you attend
the Annual Meeting.
Sincerely,
Michael C. Higgins
President
Germantown, Maryland
August , 1997
<PAGE>
ZMAX CORPORATION
20251 CENTURY BOULEVARD
GERMANTOWN, MARYLAND 20874
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD SEPTEMBER , 1997
Notice is hereby given that the 1997 Annual Meeting of Stockholders (the
"Meeting") of ZMAX Corporation, a Nevada corporation ("Old ZMAX"), will be
held at [location to be determined] on September , 1997, at 11:00 A.M.,
local time, for the following purposes;
1. To elect directors to serve until the next annual meeting of
stockholders.
2. To approve the ZMAX Corporation 1997 Stock Incentive Plan.
3. To approve and adopt an Agreement and Plan of Merger, dated as of June
10, 1997 (the "Merger Agreement"), between Old ZMAX and New ZMAX
Corporation, a Delaware corporation ("New ZMAX"), pursuant to which, among
other things (i) Old ZMAX will be merged with and into New ZMAX (the
"Merger") and (ii) each share of Common Stock, $0.001 par value, of Old
ZMAX ("Old ZMAX Common Stock") will be converted into the right to receive,
and become exchangeable for, one share of Common Stock, $0.001 par value,
of New ZMAX as more fully described in the accompanying Proxy
Statement/Prospectus. Pursuant to Nevada law, Old ZMAX stockholders will be
entitled to dissenters' rights in connection with the Merger, as more fully
described in the accompanying Proxy Statement/Prospectus. A copy of the
Merger Agreement is attached as Annex A to the Proxy Statement/Prospectus
and is incorporated herein by reference.
4. To transact any other business incidental to the Meeting that may
properly come before the Meeting or any adjournment or postponement
thereof.
The Board of Directors of Old ZMAX has fixed August , 1997 as the record
date for the determination of stockholders entitled to notice of and to vote
at the Meeting. Whether or not you plan to attend the Meeting, please
complete, date and sign the enclosed proxy card and mail it promptly in the
enclosed pre-addressed envelope, which requires no postage if mailed in the
United States.
By Order of the Board of Directors,
G.W. Norman Wareham
Secretary
Germantown, Maryland
August , 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary.................................................................. 4
Risk Factors............................................................. 10
The Meeting.............................................................. 13
The Company.............................................................. 16
The Merger............................................................... 17
The Exchange Offer....................................................... 22
Capitalization........................................................... 29
Price Range of Common Stock and Dividend Policy.......................... 30
Selected Financial Data.................................................. 31
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 32
Business................................................................. 37
Management and Executive Compensation.................................... 45
Proposal to Elect Directors.............................................. 54
Proposal to Approve ZMAX Corporation 1997 Stock Incentive Plan........... 54
Principal Shareholders................................................... 58
Certain Relationships and Related Party Transactions..................... 60
Description of the Securities............................................ 61
Shares Eligible for Future Sale.......................................... 64
Comparison of Stockholder Rights......................................... 65
Stockholder Proposals for 1998 Annual Meeting............................ 69
Legal Matters............................................................ 69
Experts.................................................................. 69
Index to Financial Statements............................................ F-1
Report of Independent Public Accountants................................. F-2
Annex A--Agreement and Plan of Merger.................................... A-1
Annex B--Form of Amended and Restated New ZMAX Certificate of Incorpora-
tion.................................................................... B-1
Annex C--Form of Amended and Restated New ZMAX Bylaws.................... C-1
Annex D--Sections 92A.300-2A.500 of the Nevada Revised Statutes.......... D-1
</TABLE>
i
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES+
+EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE +
+SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION--DATED JUNE 23, 1997
PROXY STATEMENT/PROSPECTUS
OF
ZMAX CORPORATION
<TABLE>
<S> <C>
For Annual Meeting of Holders of Shares of Offer to Exchange its Common Stock and Warrants for all of its
Common Stock, $0.001 par value, of ZMAX Corporation outstanding 8% Convertible Exchangeable Subordinated
Debentures
</TABLE>
-----------
PROSPECTUS OF
NEW ZMAX CORPORATION
Up to 11,870,514 Shares of
Common Stock, $0.001 Par Value
-----------
This Proxy Statement/Prospectus is being furnished by ZMAX Corporation, a
Nevada corporation ("Old ZMAX"), and New ZMAX Corporation, a Delaware
corporation ("New ZMAX"), to holders of shares of Common Stock, $0.001 par
value, of Old ZMAX ("Old ZMAX Common Stock") in connection with the
solicitation of proxies by the Board of Directors of Old ZMAX (the "Old ZMAX
Board") for use at the Annual Meeting of Stockholders to be held at the time
and place and for the purposes set forth in the accompanying Notice of Annual
Meeting of Stockholders, or any adjournment or postponement thereof (the
"Meeting").
At the Meeting, the stockholders of Old ZMAX will be asked to (i) elect
directors to serve until the next annual meeting of stockholders, (ii) approve
the ZMAX Corporation 1997 Stock Incentive Plan and (iii) approve and adopt an
Agreement and Plan of Merger, dated as of June 10, 1997 (the "Merger
Agreement"), between Old ZMAX and New ZMAX. A copy of the Merger Agreement is
attached to this Proxy Statement/Prospectus as Annex A and is incorporated
herein by reference.
Under the terms of the Merger Agreement, upon completion of the merger of Old
ZMAX with and into New ZMAX (the "Merger"), each outstanding share of Old ZMAX
Common Stock will be converted into the right to receive and become
exchangeable for one share (the "Exchange Ratio") of Common Stock, $0.001 par
value, of New ZMAX ("New ZMAX Common Stock"). In addition, the directors of Old
ZMAX elected at the Meeting will become the directors of New ZMAX, and the Old
ZMAX 1997 Stock Incentive Plan will become the New ZMAX 1997 Stock Incentive
Plan.
This Proxy Statement/Prospectus also constitutes the prospectus of New ZMAX
with respect to 11,870,514 shares of New ZMAX Common Stock to be issued in
connection with the Merger in exchange for the outstanding shares of Old ZMAX
Common Stock. New ZMAX has filed a Registration Statement on Form S-4, together
with any amendments thereto (File No. 333- ) (the "Registration Statement"),
with the Securities and Exchange Commission ("SEC" or "Commission") under the
Securities Act of 1933, as amended (the "Securities Act"), registering an
aggregate of 11,870,514 shares of New ZMAX Common Stock that may be issued in
connection with the Merger. This Proxy Statement/Prospectus does not cover any
resales of New ZMAX Common Stock that will be received by Old ZMAX stockholders
in connection with the Merger, and no person is authorized to make any use of
this Proxy Statement/Prospectus in connection with any such resale. However,
following the Merger, it is anticipated that shares of New ZMAX Common Stock
will be freely transferable without restriction under the Securities Act,
except for shares of New ZMAX Common Stock beneficially owned by affiliates of
New ZMAX or subject to contractual restrictions. See "Shares Eligible for
Future Sale."
SEE "RISK FACTORS" FOR A DISCUSSION OF CERTAIN FACTORS THAT THE EXISTING
HOLDERS OF OLD ZMAX COMMON STOCK SHOULD CONSIDER IN EVALUATING THE MERGER,
INCLUDING THEIR PROSPECTIVE INVESTMENT IN SHARES OF NEW ZMAX COMMON STOCK.
Old ZMAX hereby offers, upon the terms and conditions set forth in this Proxy
Statement/Prospectus and the accompanying Letter of Transmittal (the "Letter of
Transmittal," which, together with this Proxy Statement/Prospectus, constitutes
the "Exchange Offer"), to each holder of Old ZMAX's 8% Convertible Exchangeable
Subordinated Debentures due 1999 (the "Debentures") the opportunity to exchange
all, but not less than all, Debentures held for (i) 220 shares of Old ZMAX
Common Stock and (ii) a Warrant (as defined herein) to purchase 220 shares of
Old ZMAX Common Stock for each $1,000 principal amount of Debentures
(collectively, the "Exchange Consideration"). This Proxy Statement/Prospectus
also constitutes the prospectus of Old ZMAX with respect to, and the
Registration Statement also registers, (i) up to 1,210,000 shares of Old ZMAX
Common Stock and Warrants for up to 1,210,000 shares of Old ZMAX Common Stock
issuable upon the acceptance of Debentures tendered for exchange in the
Exchange Offer and (ii) the issuance of up to 1,210,000 shares of Old ZMAX
Common Stock issuable upon the exercise of the Warrants issued in the Exchange
Offer.
-----------
The date of this Proxy Statement/Prospectus is July , 1997.
<PAGE>
This Proxy Statement/Prospectus and the enclosed forms of proxy are first
being mailed to stockholders of Old ZMAX on or about August , 1997.
On August , 1997, the last reported bid price of a share of Old ZMAX Common
Stock on the OTC Bulletin Board, a service provided by Nasdaq Stock Market,
Inc., was $ .
Following the completion of the transactions described herein, the Company
intends to furnish to its stockholders annual reports containing audited
financial statements.
UNTIL , 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THE TRANSACTIONS DESCRIBED HEREIN,
MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS REQUIREMENT IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS.
THE SECURITIES TO BE ISSUED PURSUANT TO THIS PROXY STATEMENT/PROSPECTUS HAVE
NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROXY STATEMENT/PROSPECTUS IN CONNECTION WITH THE OFFERS CONTAINED HEREIN AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROXY STATEMENT/PROSPECTUS DOES
NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES
OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THOSE TO WHICH IT
RELATES IN ANY STATE TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE SUCH OFFER
IN SUCH STATE. THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS AT ANY TIME
DOES NOT IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
2
<PAGE>
AVAILABLE INFORMATION
Old ZMAX and New ZMAX have filed with the Commission a Registration
Statement on Form S-4 under the Securities Act with respect to the securities
of Old ZMAX to be issued in the Exchange Offer and the shares of New ZMAX
Common Stock to be issued pursuant to the Merger Agreement. This Proxy
Statement/Prospectus does not contain all the information set forth in the
Registration Statement, certain portions of which have been omitted pursuant
to the rules and regulations of the SEC. Such additional information may be
obtained from the SEC's principal office in Washington, D.C.
Upon completion of the offering of New ZMAX Common Stock described in this
Proxy Statement/Prospectus, New ZMAX will be subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith will file reports, proxy statements and
other information with the SEC. Copies of these materials may be inspected and
copied at the public reference facilities maintained by the SEC at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
following regional offices of the SEC: 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511; and 7 World Trade Center, Suite 1300, New York,
New York 10048. Copies of these materials can be obtained at prescribed rates
from the Public Reference Section of the SEC, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies may also be obtained through the Internet from
the SEC's site on the World Wide Web at the following address:
http://www.sec.gov.
3
<PAGE>
SUMMARY
The following summary is qualified in its entirety by the detailed
information appearing elsewhere in this Proxy Statement/Prospectus. Investors
are urged to review the entire Proxy Statement/Prospectus and the Annexes
hereto. Capitalized terms used and not otherwise defined in this Summary have
the meanings given to them elsewhere in this Proxy Statement/Prospectus. Unless
the context otherwise requires, the "Company" refers to Old ZMAX together with
its subsidiary with respect to matters arising prior to the Effective Time of
the Merger and to New ZMAX together with its subsidiary with respect to matters
arising after the Effective Time of the Merger. "Common Stock" refers to Old
ZMAX Common Stock prior to the Effective Time and New ZMAX Common Stock after
the Effective Time.
On November 6, 1996, Old ZMAX, 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, the
acquisition has been treated as a recapitalization of CSI with CSI as the
acquirer (a reverse acquisition). The historical financial statements prior to
November 6, 1996 are those of CSI. The accompanying consolidated financial
statements include all of the accounts of CSI and the accounts of Old ZMAX for
the period from the acquisition on November 6, 1996, through December 31, 1996.
OVERVIEW
THE MERGER
ZMAX Corporation, a Nevada corporation ("Old ZMAX"), proposes to merge with
and into New ZMAX Corporation, a Delaware corporation ("New ZMAX"), pursuant to
an Agreement and Plan of Merger dated as of June 10, 1997 between Old ZMAX and
New ZMAX (the "Merger Agreement"). See "The Merger." At the time the Merger
becomes effective, each outstanding share of Common Stock, $0.001 par value, of
Old ZMAX ("Old ZMAX Common Stock") will be converted into the right to receive,
and will be exchangeable for one share of Common Stock, $0.001 par value, of
New ZMAX ("New ZMAX Common Stock"). New ZMAX intends to apply for quotation of
the New ZMAX Common Stock on the Nasdaq SmallCap Market. Shares of New ZMAX
Common Stock issued in the Merger will be freely transferable without
restriction under the Securities Act of 1933, as amended, except for shares of
New ZMAX Common Stock beneficially owned by affiliates of New ZMAX or subject
to contractual restriction. See "Shares Eligible for Future Sale."
THE EXCHANGE OFFER
Old ZMAX hereby offers, upon the terms and conditions set forth in this Proxy
Statement/Prospectus and the accompanying Letter of Transmittal (the "Letter of
Transmittal," which together with this Proxy Statement/Prospectus, constitutes
the "Exchange Offer"), to each holder of Old ZMAX's 8% Convertible Exchangeable
Subordinated Debentures due 1999 (the "Debentures") the opportunity to exchange
all, but not less than all, Debentures held by such holder for (i) 220 shares
of Old ZMAX Common Stock and (ii) a Warrant to purchase 220 shares of Old ZMAX
Common Stock (the "Warrant Shares"), for each $1,000 principal amount of
Debentures. The Letter of Transmittal also invites the exchanging Debenture
holder to immediately exercise the Warrants received in the Exchange Offer. The
exchange of at least 90% of the Debentures for Old ZMAX Common Stock and the
exercise of Warrants for at least 80% of the Warrant Shares are conditions to
the consummation of the Merger. See "The Exchange Offer" and "The Merger--The
Merger Agreement--Conditions to the Merger."
THE MEETING
At the Old ZMAX 1997 Annual Meeting of Stockholders (the "Meeting"), the
stockholders of Old ZMAX will be asked to (i) elect directors to serve until
the next annual meeting, (ii) approve the ZMAX Corporation
4
<PAGE>
1997 Stock Incentive Plan (the "Incentive Plan"), and (iii) consider and vote
upon the proposal to approve and adopt the Merger Agreement. The Meeting is
scheduled to be held at 11:00 A.M., local time, on September , 1997, at
[location to be determined]. The Board of Directors of Old ZMAX (the "Old ZMAX
Board") has fixed the close of business on August , 1997 as the record date
(the "Record Date") for the determination of holders of Old ZMAX Common Stock
entitled to notice of and to vote at the Meeting. Only holders of record of Old
ZMAX Common Stock at the close of business on the Record Date will be entitled
to notice of and to vote at the Meeting. See "The Meeting."
The Old ZMAX Board unanimously approved the Merger Agreement and recommends
that Old ZMAX stockholders vote "FOR" approval and adoption of the Merger
Agreement. See "The Merger--Recommendations of the Board and Principal Reasons
for the Merger and the Exchange Offer" and "The Merger--Interests of Certain
Persons." The Old ZMAX Board also recommends that Old ZMAX stockholders vote
"FOR" the nominees for election as directors and "FOR" the approval of the
Incentive Plan.
THE PARTIES
Old ZMAX focuses on acquiring, building and operating companies in the
information technology industry. In September 1996, Old ZMAX agreed to acquire
all of the shares in Century Services, Inc., a Maryland corporation ("CSI").
CSI offers re-engineering and information processing services to users of
large-scale computer systems in North America and Europe. CSI specializes in
assisting business organizations and government agencies with what has become
popularly known as the "Year 2000 problem." Over the next several years, CSI
expects to devote substantial resources to assisting its clients in preparing
for and implementing the conversion of their computer systems to allow those
clients to continue operations without interruption in the 21st Century. See
"The Company" and "Business."
New ZMAX is a newly formed, wholly owned subsidiary of Old ZMAX formed solely
for the purpose of effecting the Merger. New ZMAX has not previously conducted
any business but will assume and carry on Old ZMAX's business without change
after the Effective Time of the Merger.
Following the Merger, New ZMAX is expected to change its name to "ZMAX
Corporation." CSI will continue to conduct its business as a wholly owned
subsidiary of New ZMAX.
THE MERGER
At the time the Merger becomes effective, Old ZMAX will be merged with and
into New ZMAX and Old ZMAX will cease to exist as a corporation. New ZMAX will
be the surviving corporation in the Merger, and CSI will thereby become a
wholly owned subsidiary of New ZMAX. All issued and outstanding shares of Old
ZMAX Common Stock will represent the right to receive and will be exchangeable
for one share of New ZMAX Common Stock in the Merger. See "The Merger."
REQUIRED VOTE
Approval of the Merger requires the affirmative vote of the holders of a
majority of the outstanding shares of Old ZMAX Common Stock entitled to vote.
EFFECTIVE TIME
After all the conditions set forth in the Merger Agreement have been
satisfied or waived, the Merger will become effective at such time as a
Certificate of Merger required under the Nevada Revised Statutes (the "Nevada
Law") and the Delaware General Corporation Law (the "Delaware Law") is filed
with the Secretaries of State of the States of Nevada and Delaware (the
"Effective Time"). Such filing will be made simultaneously with or as soon as
practicable after the closing of the Merger.
5
<PAGE>
EXCHANGE OF STOCK CERTIFICATES
From and after the Effective Time, each share of Old ZMAX Common Stock will
be automatically converted into the right to receive one share of New ZMAX
Common Stock. As soon as practicable after the Effective Time, New ZMAX will
send transmittal instructions to each former Old ZMAX stockholder describing
the procedure for surrendering Old ZMAX stock certificates for New ZMAX stock
certificates.
RECOMMENDATIONS OF THE BOARD AND REASONS FOR THE MERGER
The Old ZMAX Board unanimously approved the Merger Agreement and recommends
that the Old ZMAX stockholders vote "FOR" approval and adoption of the Merger
Agreement. The recommendation of the Old ZMAX Board regarding the Merger
Agreement is based upon the belief of the Old ZMAX directors that the terms of
the Merger Agreement are fair from a financial point of view to the
stockholders of Old ZMAX. For a discussion of Old ZMAX's reasons for the
Merger, see "The Merger--Recommendations of the Board and Principal Reasons for
the Merger and the Exchange Offer."
INTERESTS OF CERTAIN PERSONS
None of Old ZMAX's directors, director nominees or executive officers have
any material interest in the Merger other than their respective pro rata
interest as a result of their beneficial ownership of Old ZMAX Common Stock. No
option or employee benefit will vest or accelerate as a result of the Merger.
None of Old ZMAX's directors, director nominees or executive officers, directly
or indirectly, hold any Debentures. As of the Record Date, Old ZMAX's current
directors, executive officers and their affiliates owned [1,867,942] shares of
Old ZMAX Common Stock entitled to vote at the Meeting (representing [19.8%] of
the outstanding Old ZMAX Common Stock), and each of such individuals have
indicated their intention to cause these shares to be voted in favor of the
Merger Agreement.
CONDITIONS TO THE MERGER
The obligations of New ZMAX and Old ZMAX to consummate the Merger are subject
to the satisfaction or waiver of certain conditions, including (i) the approval
of the Merger Agreement by the Old ZMAX stockholders, (ii) the exchange of at
least 90% of the Debentures in the Exchange Offer and (iii) the exercise of
Warrants for at least 80% of the Warrant Shares. See "The Merger--The Merger
Agreement--Conditions to the Merger."
RIGHTS TO TERMINATE AND AMENDMENTS
The Merger Agreement may be terminated prior to the closing of the
transactions contemplated thereby under certain circumstances. Subject to
compliance with applicable law, the Merger Agreement may be amended at any time
prior to the Effective Time by a written agreement executed by New ZMAX and Old
ZMAX.
COMPARISON OF RIGHTS UNDER APPLICABLE LAW
The rights of stockholders of Old ZMAX are currently governed by the Nevada
Law, the Old ZMAX Articles of Incorporation and the Old ZMAX Bylaws. After the
Merger, Old ZMAX stockholders will become stockholders of New ZMAX and from and
after the Effective Time their rights as stockholders of New ZMAX will be
governed by the Delaware Law, the Amended and Restated New ZMAX Certificate of
Incorporation and the Amended and Restated New ZMAX Bylaws that will be adopted
as part of the Merger. See "Comparison of Stockholder Rights."
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
It is expected that the Merger will constitute a reorganization for U.S.
federal income tax purposes and, accordingly, that no gain or loss will be
recognized by holders of Old ZMAX Common Stock upon the exchange
of Old ZMAX Common Stock for shares of New ZMAX Common Stock (except with
respect to any cash received upon the exercise of dissenters' rights) and the
exchange of Old ZMAX Warrants (received pursuant to
6
<PAGE>
the Exchange) for New ZMAX Warrants. See "The Merger--U.S. Federal Income Tax
Consequences of the Merger." Each stockholder of Old ZMAX is urged to consult
such stockholder's tax advisor to determine the specific tax consequences of
the Merger to such stockholder.
DISSENTERS' RIGHTS
Holders of Old ZMAX Common Stock are entitled to dissenters' rights under the
Nevada Law in connection with the Merger. See "The Merger--Dissenters' Rights"
and Sections 92A.300-92A.500 of the Nevada Law attached as Annex D hereto.
REGULATORY MATTERS
Old ZMAX is not aware of any regulatory requirements that must be satisfied
or approvals that must be obtained in connection with the Merger other than
state "blue sky" securities laws.
MARKET PRICE AND TRADING INFORMATION
The Old ZMAX Common Stock is quoted on the OTC Bulletin Board, a service
provided by Nasdaq Stock Market, Inc., and subsequent to the Effective Time of
the Merger, New ZMAX intends to apply for quotation of the New ZMAX Common
Stock on the Nasdaq SmallCap Market under the symbol "ZMAX." On June 18, 1997,
the closing bid and asked sales prices of Old ZMAX Common Stock, as quoted on
the OTC Bulletin Board, were $14.50 and $14.375, respectively. See "Price Range
of Common Stock and Dividend Policy."
THE EXCHANGE OFFER
Old ZMAX offers to exchange (the "Exchange Offer") the Old ZMAX 8%
Convertible Exchangeable Subordinated Debentures due 1999 (the "Debentures") on
the terms and conditions set forth herein and the accompanying Letter of
Transmittal (which, together with this Proxy Statement/Prospectus, constitutes
the Exchange Offer). As of the date of this Proxy Statement/Prospectus, $5.5
million aggregate principal amount of Debentures were outstanding. See "The
Exchange Offer" and "Description of Securities--Debentures."
SECURITIES OFFERED IN EXCHANGE
Each Debenture holder will receive (i) 220 shares of Old ZMAX Common Stock
and (ii) a Warrant to purchase 220 shares of Old ZMAX Common Stock per $1,000
principal amount of Debentures exchanged. No additional payment or adjustment
will be made for accrued but unpaid interest from June 1, 1997 (the last
interest payment date) to the date of the exchange. The Warrants are
exercisable immediately upon issuance at a purchase price of $7 per share of
Old ZMAX Common Stock increasing to $8 per share on the first anniversary of
the date of issuance, and expire on the second anniversary of the date of
issuance. See "Description of Securities--Debentures."
EXPIRATION DATE
The Exchange Offer will expire at 5:00 p.m. Eastern Standard Time on
September , 1997 (the "Expiration Date").
CONDITIONS
The consummation of the Exchange Offer is subject to the satisfaction of
certain conditions, which may be waived by the Company. See "The Exchange
Offer--Conditions of the Exchange Offer."
PURPOSE AND EFFECTS OF THE EXCHANGE OFFER
The Company is undertaking the Exchange Offer to retire outstanding debt,
improve the Company's debt-to-equity ratio and increase stockholders' equity.
See "The Exchange Offer--Purposes and Effects of the Exchange Offer."
PROCEDURES FOR TENDERING
For Debentures to be validly tendered pursuant to the Exchange Offer, a
Letter of Transmittal (or a facsimile thereof) that has been properly completed
and duly executed by the registered holder of the Debenture, and any other
documents required by the Letter of Transmittal, must be received by the
Exchange Agent at its address set forth herein prior to the Expiration Date.
7
<PAGE>
CONSEQUENCES FOR NONTENDERING DEBENTURE HOLDERS
The Company currently intends to redeem for cash any Debentures remaining
outstanding following completion of the Exchange Offer at 100% of the principal
amount thereof plus any interest accrued thereon.
WITHDRAWAL RIGHTS
Debentures tendered pursuant to the Exchange Offer may be withdrawn, subject
to the procedures described herein, at any time on or before September ,
1997.
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE EXCHANGE
For U.S. federal income tax purposes, no gain or loss should be recognized by
Old Zmax or the Debenture holders upon the exchange of the Debentures for Old
Zmax Common Stock and Warrants to purchase Old Zmax Common Stock. See "The
Exchange--U.S. Federal Income Tax Consequences of the Exchange." Each Debenture
holder is urged to consult such holder's tax advisor to determine the specific
tax consequences of the exchange to such holder.
EXCHANGE AGENT
The Company is serving as the Exchange Agent (the "Exchange Agent") in
connection with the Exchange Offer. The Company will provide certain
information and assistance to the holders of Debentures. The Company's
telephone number is (301) 353-9500.
RISK FACTORS
In considering the transactions described herein, investors should consider
the following: (i) Old ZMAX's history of losses; (ii) the fact that CSI has
expended substantial time and financial resources in developing a new and
innovative solution for the Year 2000 problem that has not yet been utilized in
any large scale conversion project; (iii) uncertainty regarding New ZMAX's and
CSI's future additional capital requirements; (iv) significant competition in
the Year 2000 industry; (v) New ZMAX's and CSI's dependence on its ability to
hire and retain key personnel; (vi) the uncertainty with respect to the payment
of dividends on the New ZMAX Common Stock; (vii) the potential volatility of
the stock price as demonstrated by the quoted market price compared to prices
in the CSI recapitalization transactions, and (viii) the limited information on
the Company and its security holders and the limitations on the ability to
enforce securities laws against non-U.S. persons. See "Risk Factors."
8
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
On November 6, 1996, Old ZMAX, 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, the
acquisition has been treated as a recapitalization of CSI with CSI as the
acquirer (a reverse acquisition). The historical financial statements prior to
November 6, 1996 are those of CSI. The accompanying consolidated financial
statements include all of the accounts of CSI and the accounts of ZMAX for the
period from the acquisition on November 6, 1996, through December 31, 1996.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------
DECEMBER 13, DECEMBER 13, DECEMBER 13,
1995 (DATE OF 1995 (DATE OF 1995 (DATE OF
INCEPTION) TO YEAR ENDED INCEPTION) TO INCEPTION) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31,
1995 1996 1996 3/31/96 3/31/97 1997
------------- ------------ ------------- -------- ----------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Operating Revenue....... $ -- $ -- $ -- $ -- $ -- $ --
Loss from Operations.... -- (1,509,413) (1,509,413) (46,814) (1,331,673) (2,841,086)
Loss from Operations per
Common Share........... $ -- $ (1.76) $ (0.12) $ (0.39)
Weighted Average Shares
Outstanding............ 400,000 855,712 400,000 3,424,371
Shares Outstanding--
period end............. 400,000 4,200,079 400,000 3,424,371
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997
------------------------
PRO FORMA
AS
ACTUAL ADJUSTED(A)
----------- -----------
<S> <C> <C>
Balance Sheet Data
Cash................................................... 3,731,416 12,201,416
Working capital........................................ 986,650 9,758,007
Total assets........................................... 7,836,589 17,184,972
Long-term obligations, less current portion............ 6,027,857 142,857
Total stockholders equity.............................. (1,424,539) 15,429,620
</TABLE>
- --------
(A) Pro Forma As Adjusted assumes (i) that the Debentures are fully exchanged
in the Exchange Offer for 1,210,000 shares of Old ZMAX Common Stock and
Warrants to purchase an equal number of shares, (ii) the full exercise of
the Warrants into 1,210,000 shares of Old ZMAX Common Stock at $7.00 per
share and (iii) that the fair market value of the Company's Common Stock on
the date of the Exchange Offer is $14.375 (the closing price on June 18,
1997 as quoted on the OTC Bulletin Board). Pro Forma As Adjusted also
includes issuances of Old ZMAX Common Stock since March 31, 1997 (see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Recent Developments"), including (i) 1,600,000 shares issued in
April 1997 upon the conversion of the Company's convertible notes,
(ii) 670,000 shares issued in April 1997 in connection with the CSI
transaction, (iii) 234,365 shares issued in April 1997 in connection with
the Company's purchase of Fiserv's interest in the Fiserv Century Services
Joint Venture, (iv) 32,077 shares issued in May 1997 as satisfaction for a
promissory note, (v) 150,000 shares issuable in connection with the
Company's acquisition of the COCACT Software, and (vi) 60,000 shares
issuable to a consultant for services rendered. For shares not issued as of
June 18, 1997, the closing price of $14.375 on June 18, 1997 is assumed to
be the fair market value of the Company's Common Stock on the date of
issuance. Pro Forma As Adjusted also assumes that the Merger has been
consummated and that no stockholders exercised their dissenters' rights.
See "The Merger--Dissenters' Rights."
9
<PAGE>
RISK FACTORS
Investment in the Company involves a high degree of risk. Investors should
consider carefully the following factors, in addition to the other information
contained in this Proxy Statement/Prospectus, in evaluating the transactions
described herein. This Proxy Statement/Prospectus contains, in addition to
historical information, forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially. Factors
that could cause or contribute to such difference include, but are not limited
to, those discussed below, as well as those discussed elsewhere in this Proxy
Statement/Prospectus.
Lack of Experience in Millennium Services. The Company has limited
experience in providing its Year 2000 or "millennium" services. Although the
Company has successfully completed a number of assessment projects and small-
scale (pilot) conversion projects, the Company has not completed a large-scale
millennium conversion project either alone or together with a strategic
partner. Pilot projects performed by the Company to date have generally
consisted of performing test conversions on a small portion of a client's
mainframe computer system. There can be no assurance that the Company will be
successful in completing large-scale conversions, that the Company will not
experience delays or failures in providing its millennium services, or that
its millennium services will be effective. In the pilot projects completed to
date, the amount of failures, errors and bugs detected, and the cost of
correcting them, have not been significant and have not had a material adverse
affect on the Company's business, operating results or financial condition.
However, the failure of the Company's Year 2000 methodology to function
properly in the future or the existence of significant errors or bugs
following completion of future millennium conversions could necessitate
significant expenditures by the Company to remedy the problem. The
consequences of failures, errors or bugs could materially and adversely affect
the Company's business, operating results and financial condition.
Recent Losses and Need for Additional Working Capital. The Company incurred
losses of $11.5 million and $2.1 million for the year ended December 31, 1996
and the three months ended March 31, 1997, respectively. As a result, the
Company had an accumulated deficit of $11.5 million and $13.7 million as of
December 31, 1996 and March 31, 1997, respectively. The Company expects to
require significant amounts of cash to support marketing and other anticipated
activities related to the establishment of its Year 2000 services business.
See "Management's Discussion and Analysis of Financial Conditions and Results
of Operations. " There can be no assurance that the Company will not
experience liquidity problems because of adverse market conditions or other
unfavorable events. Further, because of the various business risks described
elsewhere in this "Risk Factors" discussion, there can be no assurance that
the Company will be profitable. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
No Liquid Market; Possible Volatility of Stock Price. Prior to the
completion of the transactions contemplated by this Proxy
Statement/Prospectus, the U.S. trading market for the Old ZMAX Common Stock
has been limited and characterized by significant price and volume volatility.
Old ZMAX has not been subject to the periodic reporting requirements of the
Exchange Act and accordingly current public information regarding Old ZMAX and
its business has not been widely disseminated by Old ZMAX. As a result of the
foregoing, historical price quotations for the Old ZMAX Common Stock may not
be indicative of the operations, financial conditions or prospects for the
Company. In this regard, the Company issued Common Stock and Common Stock
equivalents in the fall of 1996 at prices less than the quoted market price at
such time. See Notes 7 and 9 of the Financial Statements of ZMAX Corporation
for the year ended December 31, 1996 included elsewhere herein. There can be
no assurance that an active trading market for the New ZMAX Common Stock will
develop or, if such a market does develop, that the market price for the New
ZMAX Common Stock price will not be subject to significant fluctuations in
response to factors such as, among others, variations in the Company's
anticipated or actual results of operations, announcements of new products or
technological innovations by the Company or its competitors, and changes in
earnings estimates by analysts. In addition, the stock market is subject to
price and volume fluctuations that affect the market prices for companies in
general, and small capitalization, emerging growth and technology companies
like the Company in particular, which fluctuations are often unrelated to the
operating performance of such companies. These broad market fluctuations could
adversely affect the market prices of the New ZMAX Common Stock. Investors in
the Company may experience dilution of their investment
10
<PAGE>
upon certain events, such as the issuance of shares of New ZMAX Common Stock
pursuant to the exercise of outstanding warrants and stock options.
Limited Information on Security Holders; Enforcement of Securities Laws
Against Non-U.S. Persons. The beneficial ownership reporting requirements of
Section 13(d) of the Exchange Act are not applicable to the Company's
stockholders because the Old ZMAX Common Stock is not a registered class of
equity securities under the Exchange Act. The Company believes a substantial
portion of its equity securities are held by non-U.S. persons, including non-
U.S. banks that hold securities on behalf of their customers and are prohibited
by local bank secrecy laws from disclosing information regarding the beneficial
ownership of accounts. Up to an additional 2,420,000 shares of New ZMAX Common
Stock would be issued to non-U.S. persons in connection with the Exchange Offer
and the exercise of the Warrants. As a result of the foregoing, non-U.S.
persons may be able to substantially influence the trading market for the
Common Stock. The Company and its shareholders may have difficulty in effecting
service of process and enforcing civil liabilities arising under U.S.
securities laws against non-U.S. persons.
Availability of Technical Personnel. The Company's strategy will require the
addition of skilled technical, marketing and management personnel. The Company
competes with major computer, communications, consulting and software
companies, as well as information service departments of major corporations, in
seeking to attract qualified personnel. This competition is expected to
intensify as demand for millennium services grows. There can be no assurance
that the Company will be able to attract and retain the personnel necessary to
pursue its strategy.
Uncertain and Undeveloped Market for Millennium Services. Millennium services
are expected to represent the significant portion of the Company's business for
the next several years. Although the Company believes that the market for
millennium services will grow significantly as the Year 2000 approaches, there
can be no assurance that this market will develop to the extent anticipated by
the Company, or at all. Significant expenses for sales and marketing may be
required to inform the public of the Year 2000 problem and the need for
millennium services. There can be no assurance that the millennium services
industry will devote the resources necessary to effectively inform the public
of the Year 2000 problem or that potential clients will understand or
acknowledge its significance. In addition, companies affected by the Year 2000
problem may not be willing or able to allocate the resources, financial or
otherwise, to address the problem in a timely manner. Many companies may be
able to resolve the problem using internal staff, by discontinuing the use of
some older programs, or by replacing existing systems with new Year 2000
compliant systems. Therefore, the development of the market for millennium
services is uncertain and unpredictable. If the market for millennium services
fails to grow, or grows more slowly than anticipated, the Company's business,
operating results and financial condition could be materially and adversely
affected.
Competition. The market for millennium services is highly competitive and
will become increasingly competitive as the Year 2000 approaches. The primary
competitive factors in the computer services industry are availability of
equipment and facilities, price, service and whether the provider's personnel
possess the skills and knowledge necessary to solve information processing
problems. A number of companies engaged in millennium services are more
established, benefit from greater name recognition and have substantially
greater financial, technical and marketing resources than the Company.
Moreover, other than technical expertise, there are no significant proprietary
or other barriers to entry in the Year 2000 services market that could keep
competitors from developing similar services or providing competing services to
those offered by the Company. There can be no assurance that the Company will
be able to compete successfully against its competitors or that the competitive
pressures faced by the Company will not affect its financial performance.
Rapid Technological Change. The information technology industry is
characterized by rapidly evolving technology and changing methodologies. The
introduction of software tools embodying new technology and the emergence of
new methodologies could render obsolete existing products and services,
including the Company's. The Company's future success will depend on its
ability to continue to refine and update its proprietary
11
<PAGE>
methodologies for correcting the Year 2000 problem. There can be no assurance
that one or more of the Company's competitors will not develop a software tool
or methodology that is superior to, or achieves a greater market acceptance
than, the Company's methodology. The development of a superior tool or
methodology by one or more competitors, or any failure by the Company to
successfully respond to such development, could materially and adversely affect
the Company's business, operating results and financial condition.
Need to Develop Additional Products and Services. The Company currently
expects to generate most of its revenue from, and devote most of its resources
to, its Year 2000 services. The Company believes that the demand for its
millennium services will continue to exist for some time after the Year 2000,
however, this demand will diminish significantly over time and will eventually
disappear. Therefore, the Company plans to continue actively pursuing business
opportunities unrelated to the Year 2000 problem in the computer software re-
engineering and consulting market, with a focus on the conversion marketplace,
and to develop products and services to take advantage of those opportunities.
The Company intends to use the relationships developed and experience obtained
while performing complex Year 2000 conversion projects to address other
information systems requirements of its clients. However, there can be no
assurance that the Company will be able to successfully expand its business
beyond the millennium conversion market. The failure to develop additional
computer software and services could materially and adversely affect the
Company's business, operating results and financial condition.
Dependence on Key Executives. The Company is largely dependent on the efforts
of Michael C. Higgins, its President, and Joseph Yeh, its Senior Vice
President--Technology. There can be no assurance that the Company will be able
to retain the services of Mr. Higgins or Mr. Yeh. Although the Company intends
to obtain life insurance on the lives of Mr. Higgins and Mr. Yeh, the loss of
either of them could materially and adversely affect the Company's business,
operating results and financial condition. See "Management and Executive
Compensation."
Limited Protection of Proprietary Information. The Company depends in part on
its proprietary know-how to differentiate its millennium services from that of
its competitors. The Company does not have any patents and relies upon a
combination of trade secret, copyright and trademark laws and contractual
restrictions to establish and protect its proprietary information. The Company
generally enters into non-disclosure and confidentiality agreements with its
employees, consultants and clients. Despite these precautions, it may be
possible for an unauthorized third party to replicate the Company's millennium
service methodology or to obtain and use information that the Company regards
as proprietary. There can be no assurance that the means used by the Company to
protect its proprietary information will be adequate or that the Company's
competitors will not independently develop substantially similar or superior
techniques to resolve the Year 2000 problem.
Risks of Third Party Claims of Infringement. As the number of competitors
providing millennium services increases, overlapping techniques used in such
services will become more likely. There can be no assurance that third parties
will not assert infringement claims against the Company in the future, that
assertion of such claims will not result in litigation, or that the Company
would prevail in such litigation or be able to obtain a license for the use of
any infringed intellectual property from a third party on commercially
reasonable terms. Furthermore, litigation, regardless of its outcome, could
result in substantial cost to the Company and divert management's attention
from the Company's operations. Any infringement claim or litigation against the
Company could materially and adversely affect the Company's business, operating
results and financial condition.
Potential Contract Liability. The Company's millennium services involve key
aspects of its clients' computer systems. Any failure in a client's system
could result in a claim for substantial damages against the Company, regardless
of the Company's responsibility for such failure. The Company attempts to limit
by contract its liability for damages arising from negligent acts, errors,
mistakes or omissions in rendering its professional services. Despite this
precaution, there can be no assurance that the limitations of liability set
forth in its service contracts would be enforceable or would otherwise protect
the Company from liability for damages. The Company maintains general liability
coverage, and is in the process of evaluating coverage options for errors and
omissions and professional liability. However, there can be no assurance that
such coverage will continue to
12
<PAGE>
be available in sufficient amounts to cover one or more large claims, or that
the insurer will not disclaim coverage as to any future claim. The successful
assertion of one or more large claims against the Company that exceed available
insurance coverage, or changes in the Company's insurance policies, including
premium increases or the imposition of a large deductible or co-insurance
requirements, could materially and adversely affect the Company's business,
operating results and financial condition.
Risk of Low-Priced Stocks. The Company intends to apply for the listing of
the Common Stock on the Nasdaq SmallCap Market effective upon completion of the
transactions contemplated by this Proxy Statement/Prospectus. To qualify for
listing and to continue to be listed on the Nasdaq SmallCap Market, a company
must meet certain financial criteria. Although the Company expects to meet
these criteria upon completion of the Merger, there can be no assurance that
the Company will meet such tests or will continue to do so in the future.
Failure to obtain a listing on the Nasdaq SmallCap Market would reduce market
interest in the New ZMAX Common Stock. Failure to meet such criteria in the
future may result in the delisting of the New ZMAX Common Stock from the Nasdaq
SmallCap Market.
Shares Eligible for Future Sale. Upon completion of the transactions
contemplated by this Proxy Statement/Prospectus, all of the outstanding New
ZMAX Common Stock will generally be freely transferable without restriction
under the Securities Act, except for shares held by affiliates of the Company
or subject to contractual restrictions. The possibility that substantial
amounts of Common Stock may be sold in the public market would likely have a
material adverse effect on prevailing market prices of the Common Stock and
could impair the Company's ability to raise capital through the sale of its
equity securities. See "Shares Eligible for Future Sale."
Management of Growth. The Company expects to experience significant expansion
that will place substantial demands upon its management, systems and resources,
including its sales, project management and consulting personnel, as well as
the Company's research and development, finance and administrative operations.
The Company's ability to manage its future growth, if any, will require the
Company to continually improve its financial and management controls and
reporting systems and procedures, as well as implementing new systems as
necessary and expanding, training and managing its workforce. There can be no
assurance that the Company's controls, systems or procedures will continue to
be adequate to support the Company's operations. The Company's management team
has had limited prior experience managing a public company or a rapidly growing
business. The failure of the Company's management to respond effectively to
changing business conditions could have a material adverse effect upon the
Company's business, operating results and financial condition.
THE MEETING
PURPOSE OF THE MEETING
Old ZMAX has called its 1997 Annual Meeting of Stockholders (the "Meeting")
to be held at [location to be determined] on September , 1997, at 11:00 A.M.
local time. At the Meeting, the holders of Old ZMAX Common Stock will be asked
(i) to elect nominees to serve as directors of the Company, (ii) to approve the
Incentive Plan and (iii) to approve and adopt the Merger Agreement and the
transactions contemplated thereby. See "The Merger."
DIRECTOR NOMINEES
Pursuant to the Old ZMAX Bylaws, the Board of Directors of Old ZMAX has set
the size of the Board of Directors at six members and has nominated the
following persons to serve as directors of Old ZMAX subject to vote of the Old
ZMAX stockholders at the Meeting:
<TABLE>
<S> <C>
Michel Berty Steve L. Komar
Michael C. Higgins G.W. Norman Wareham
Ted Fine Edward Yourdon
</TABLE>
For a biographical description of the experience and qualifications of the
nominees, see "Management and Executive Compensation--Directors and Director
Nominees" and "Proposal to Elect Directors."
13
<PAGE>
STOCK INCENTIVE PLAN
The Incentive Plan was adopted by the Old ZMAX Board of Directors and
provides the Company with increased flexibility to grant equity-based
compensation to key employees, officers, directors and consultants of the
Company. For a detailed description of the Incentive Plan, see "Proposal to
Approve ZMAX Corporation 1997 Stock Incentive Plan."
RECOMMENDATIONS OF THE BOARD
The Old ZMAX Board recommends a vote "FOR" each of the nominees for the
Board of Directors and "FOR" approval of the Incentive Plan. The Old ZMAX
Board has also unanimously approved the Merger Agreement and the transactions
contemplated thereby and recommends that the Old ZMAX stockholders vote "FOR"
approval and adoption of the Merger Agreement and the transactions
contemplated thereby. See "The Merger--Recommendations of the Board and
Principal Reasons for the Merger and the Exchange Offer." In rendering its
recommendation to the Old ZMAX stockholders, the Old ZMAX Board concluded that
the overall effect of the Merger and the other transactions that will occur in
conjunction with the Merger, including the Exchange Offer and the Warrant
exercise, would result in a significant infusion of equity capital and the
development of a more liquid trading market for New ZMAX Common Stock
following the Merger and the availability of current public information
regarding New ZMAX since, following the Merger, New ZMAX will be subject to
the periodic reporting obligations contained in the Securities Exchange Act of
1934, as amended (the "Exchange Act"). This result should facilitate the
ability of New ZMAX to access the capital markets in the future. The
obligations of New ZMAX and Old ZMAX to consummate the Merger are subject to
the satisfaction or waiver of a number of conditions, including the approval
of the Merger Agreement by the Old ZMAX stockholders, the exchange of at least
90% of the Debentures and the exercise of Warrants for at least 80% of the
Warrant Shares. See "The Merger--The Merger Agreement--Conditions to the
Merger."
DATE, TIME AND PLACE; RECORD DATE
The Meeting is scheduled to be held at 11:00 A.M., local time on September
, 1997, at [location to be determined]. The Old ZMAX Board has fixed the
close of business on August , 1997 as the record date (the "Record Date") for
the determination of holders of Old ZMAX Common Stock entitled to notice of
and to vote at Meeting. Only holders of record of Old ZMAX Common Stock at the
close of business on the Record Date will be entitled to notice of and to vote
at the Meeting.
QUORUM AND VOTING RIGHTS
Under the Nevada Law, directors are elected by plurality vote, and
therefore, the six candidates receiving the highest number of votes of shares
of Old ZMAX Common Stock entitled to be voted will be elected. Votes withheld
from any candidate(s) and abstentions will have no effect on the election of
directors. The approval of the Incentive Plan requires the affirmative vote of
a majority of the shares of Old ZMAX Common Stock present in person or
represented by proxy at the Meeting and entitled to vote on such matters.
Pursuant to the Nevada Law, the affirmative vote of the holders of at least a
majority of shares of Old ZMAX Common Stock outstanding and entitled to vote
as of the Record Date is required to approve and adopt the Merger Agreement
and the transactions contemplated thereby. Abstentions and broker non-votes
will have the effect of a vote against the proposals to approve the Merger
Agreement and the Incentive Plan. A broker non-vote occurs when a nominee of a
beneficial owner of shares of Old ZMAX Common Stock does not have
discretionary authority with respect to a matter and does not receive voting
instructions from such beneficial owner.
At the Record Date, there were 9,450,514 shares of Old ZMAX Common Stock
outstanding. Holders of record of Old ZMAX Common Stock on the Record Date are
entitled to one vote per share at the Meeting. The presence, either in person
or by proxy, of the holders of a majority of the outstanding shares of Old
ZMAX Common Stock outstanding and entitled to vote as of the Record Date at
the Meeting is necessary to constitute a quorum at the Meeting.
The Old ZMAX Board is soliciting proxies so that each holder of Old ZMAX
Common Stock on the Record Date has the opportunity to vote in the election of
directors, to approve the Incentive Plan and to approve and adopt the Merger
Agreement at the Meeting. When a proxy card is returned properly signed and
dated, the shares
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represented thereby will be voted in accordance with the instructions on the
proxy card. If a stockholder does not return a signed proxy card, his or her
shares will not be voted and thus will have the effect of a vote against the
approval of the Incentive Plan and the Merger Agreement. Abstentions will be
counted for purposes of determining the existence of a quorum at the Meeting.
Since approval of the Incentive Plan requires the affirmative vote of a
majority of the shares of Old ZMAX Common Stock present and entitled to vote
at the Meeting and approval of the Merger requires the affirmative vote of a
majority of the issued and outstanding shares of Old ZMAX Common Stock
entitled to vote thereon, abstentions will have the effect of a negative vote
on these proposals. If a stockholder returns a signed proxy card, but does not
indicate how his or her shares are to be voted, the shares of Old ZMAX Common
Stock represented by such proxy card will be voted "FOR" election of the
nominees named herein as directors, "FOR" approval of the Incentive Plan and
"FOR" approval and adoption of the Merger Agreement and the transactions
contemplated thereby. The proxy card also confers discretionary authority on
the individuals appointed by the Old ZMAX Board and named on the proxy card to
vote the shares represented thereby on any matter incidental to the Meeting
that is properly presented for action at the Meeting.
Any Old ZMAX stockholder who executes and returns a proxy card may revoke
such proxy at any time before it is voted by (i) notifying in writing the
Secretary of Old ZMAX at c/o ZMAX Corporation, 20251 Century Boulevard,
Germantown, Maryland 20874, (ii) granting a subsequent proxy or (iii)
appearing in person and voting at the Meeting. Attendance at the Meeting will
not in and of itself constitute revocation of a proxy.
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THE COMPANY
The Company was organized as a Nevada corporation on April 24, 1986, under
the name of Pandora, Inc. for the purpose of creating a vehicle to obtain
capital to seek out, investigate and acquire interests in products, properties
and businesses that may have potential for profit. Until May 4, 1992, the
Company transacted no business other than the investigation of various
business opportunities. On May 4, 1992, the Company amended its Articles of
Incorporation to change the name of the Company to Oryx Gold Corporation in
connection with a reorganization in which the Company acquired 100% ownership
of American Oil and Gas Corporation ("American Oil"). American Oil was
organized on November 22, 1991, as a Nevada corporation, and conducted no
business other than the acquisition of an interest in certain unpatented
placer mining claims in Nevada. The Company intended to develop the mining
claims and other acquired interests in the mining and gas industry in a manner
profitable to the Company and, on August 16, 1995, the Company changed its
name to Mediterranean Oil Corporation to more accurately reflect the nature of
its business. The Company did not subsequently pursue this business. American
Oil's corporate status has been suspended by the Secretary of State of Nevada
as of December 1, 1995, and this subsidiary has been abandoned by the Company.
In the summer of 1996, the Company identified Century Services, Inc. ("CSI")
as a new acquisition target and signed a letter of intent to acquire all of
the issued and outstanding stock of CSI on September 20, 1996. In connection
with preparing for the CSI transaction, the Company undertook a reverse share
split to reduce the number of shares of its Common Stock outstanding and
changed its name to ZMAX Corporation. Following this restructuring, on
November 6, 1996, the Company acquired 100% of the issued and outstanding
stock of CSI, and CSI is now a wholly owned subsidiary of the Company. CSI was
a privately held company formed as a Maryland corporation in December 1995 to
perform software re-engineering related to providing a solution to the Year
2000 problem. Since the CSI transaction, the Company has focused on the
software re-engineering market in general and the Year 2000 market in
particular. For financial reporting purposes, the CSI transaction has been
treated as a recapitalization of CSI with CSI as the acquirer (a reverse
acquisition).
Prior to the recapitalization, in April 1996, CSI entered into a strategic
partnership with Fiserv Federal Systems, Inc. ("Fiserv Federal") to form
Fiserv Century Services Joint Venture (the "Joint Venture"). CSI and Fiserv
Federal each owned 50% of the Joint Venture. Fiserv Federal is part of Fiserv,
Inc., a publicly-held company that offers centralized data processing services
to financial institutions. The Joint Venture was engaged in the business of
marketing Year 2000 computer consulting services using computer software
exclusively licensed to CSI. As part of the CSI recapitalization, Fiserv
agreed to sell its interest in the Joint Venture to Old ZMAX. Since Old ZMAX's
acquisition of Fiserv Federal's interest in the Joint Venture, CSI has carried
on the operations of the Joint Venture. After the CSI recapitalization, Old
ZMAX transferred all of its interest in the Joint Venture to CSI as of January
1, 1997, and CSI, as the sole remaining venture partner, terminated the Joint
Venture. At this time, all of the Company's Year 2000 business is operated by
CSI.
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THE MERGER
THE MERGER
Subject to the conditions summarized below, the Company will be
reincorporated in Delaware by merging Old ZMAX with and into New ZMAX (the
"Merger") pursuant to the Merger Agreement. New ZMAX will succeed to all the
business, properties, assets and liabilities of Old ZMAX, and the stockholders
of Old ZMAX will, upon surrender of their shares of Old ZMAX Common Stock for
exchange, become stockholders of New ZMAX. After the Merger, the rights of the
Company's stockholders will be governed by the Delaware Law and by the Amended
and Restated New ZMAX Certificate of Incorporation and Amended and Restated
Bylaws that will be adopted as part of the Merger, rather than by the Nevada
Law and the Old ZMAX Articles of Incorporation and Bylaws. A copy of the New
ZMAX Amended and Restated Certificate of Incorporation is attached as Annex B
(the "New ZMAX Certificate of Incorporation"), and a copy of the Amended and
Restated Bylaws is attached as Annex C (the "New ZMAX Bylaws").
RECOMMENDATIONS OF THE BOARD AND PRINCIPAL REASONS FOR THE MERGER AND THE
EXCHANGE OFFER
To implement its business plan and achieve its strategic objective to
deliver high quality millennium services in a cost effective manner, the
Company will require significant amounts of cash, including equity capital, to
support its activities. In view of the Company's lack of profitable operations
coupled with its lack of experience in the millennium services business, the
Company believes that most potential investors would only be willing to
consider an investment in the form of a loan or in an equity security that has
preferential rights to the rights of Old ZMAX Common Stock in the event of
liquidation. In addition, any borrowing arrangement would likely bear interest
at a level substantially in excess of prevailing market rates that are
available to some of the Company's competitors, thereby putting the Company at
a competitive disadvantage in terms of its cost structure.
The Company is undertaking the Exchange Offer in order to facilitate the
consummation of the restructuring contemplated by the Merger through the
retirement of outstanding debt of the Company, to improve the Company's debt
to equity ratio by decreasing total liabilities, increasing total
stockholders' equity and eliminating approximately $440,000 of annual interest
expense. The Debentures accrue interest at 8% per annum, payable semi-annually
commencing June 1, 1997. The Debentures may not be redeemed until the Company
has first made an exchange offer. Upon completion of the Exchange Offer, the
Company will have the option of (i) redeeming any remaining outstanding
Debentures at par through the date of redemption or (ii) paying interest on
the outstanding Debentures semi-annually until paying off the Debentures at
maturity in December 1999. To minimize any additional dilution upon the
conversion of Debentures not surrendered for exchange in the Exchange Offer,
the Company presently intends to redeem for cash any Debentures outstanding
promptly after completion of the Exchange Offer.
In the Exchange Offer, each exchanging Debenture holder will also receive a
Warrant to purchase Old ZMAX Common Stock at a price of $7 per share through
the first anniversary of the completion of the Exchange Offer and thereafter
at $8 per share. The Warrants expire on the second anniversary of the
completion of the Exchange Offer. The obligation of Old ZMAX to consummate the
Merger is conditioned on the exchange of at least 90% of the Debentures and
the immediate exercise of Warrants issued in the Exchange Offer so that at
least 80% of the Warrant Shares are issued. As a result of this exchange and
exercise, the Company will issue at least 2,057,000 shares of Old ZMAX Common
Stock and receive in connection therewith at least $6.7 million in cash that
will be reflected on the Company's balance sheet as equity capital.
As an incentive to induce Debenture holders to surrender their Debentures
for exchange in the Exchange Offer and to exercise their Warrants received in
connection with the Exchange Offer, Old ZMAX and New ZMAX have determined to
register the securities issuable in connection with the Exchange Offer and the
Merger under the Securities Act. Following the Merger, all shares of New ZMAX
Common Stock issued in the Merger will be freely transferable without
restriction or further registration under the Securities Act except for shares
beneficially owned by "affiliates" of the Company (as defined in Rule 144
under the Securities Act which,
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generally speaking, includes all directors, executive officers and beneficial
owners of 10% or more of the Company's issued and outstanding common stock)
whose shares will be "restricted securities." Restricted securities generally
may only be sold in compliance with Rule 144. Absent registration of the New
ZMAX Common Stock to be issued in the Merger, all of the outstanding shares of
Old ZMAX converted subsequently into New ZMAX Common Stock would constitute
"restricted securities" under the Securities Act. The Company intends to apply
for the listing of the New ZMAX Common Stock on the Nasdaq SmallCap Market
effective upon completion of the Merger. See "The Exchange Offer--Exercise of
Warrants."
In addition, as a result of the Merger, New ZMAX will be subject to the
periodic reporting requirements of the Exchange Act. Following the Merger, New
ZMAX will prepare and file with the Commission annual and quarterly reports on
forms prescribed by the Commission. Other information required by the
Commission such as proxy statements and reports regarding purchases and sales
of New ZMAX Common Stock by affiliates of New ZMAX also will be publicly
available. The Old ZMAX Board of Directors determined that the availability of
current public information relating to the Company along with the existence of
a market in which to execute purchases and sales of New ZMAX Common Stock will
provide a significant benefit to the investing market in general and New ZMAX
stockholders in particular. Furthermore, the foregoing factors should also
facilitate the ability of New ZMAX to access the capital markets in the future
in an expeditious manner and on more competitive terms than are currently
available to Old ZMAX.
The Exchange Offer will result in converting approximately $5.5 million of
indebtedness into equity and the exercise of the Warrants will enable the
Company to benefit from the infusion of at least $6.7 million in new equity
capital. The Old ZMAX Board also concluded that there were not any alternative
transactions available to Old ZMAX at the present time that would provide the
same benefits as will be realized from the Exchange Offer, the exercise of the
Warrants and the Merger. In addition, the Company believes that any
alternative transaction would almost certainly be subject to a number of
contingencies and would have been unlikely to be capable of being accomplished
as expeditiously as the Exchange Offer, the exercise of the Warrants and the
Merger.
In considering the Merger, the Board of Directors determined that the best
interests of the Company will be served by changing the state of incorporation
of the Company from Nevada to Delaware. As the Company plans for the future,
the Board of Directors and management believe that it is essential to be able
to draw upon well established principles of corporate governance in making
legal and business decisions. The prominence and predictability of Delaware
corporate law provide a reliable foundation on which the Company's governance
decisions can be based. The Company believes that its stockholders will
benefit from the responsiveness of Delaware corporate law to their needs and
to those of the Company. The advantages of Delaware corporate law are
described below.
ADVANTAGES OF DELAWARE CORPORATE LAW
By changing the state of incorporation of the Company from Nevada to
Delaware, the Company will receive the following advantages:
Prominence, Predictability and Flexibility of Delaware Law. For many years,
Delaware has followed a policy of encouraging incorporation in that state. In
furtherance of that policy, Delaware has been a leader in adopting, construing
and implementing comprehensive, flexible corporate laws responsive to the
legal and business needs of corporations organized in Delaware. Many
corporations have chosen Delaware initially as a state of incorporation or
have subsequently changed corporate domicile to Delaware. Because of
Delaware's prominence as the state of incorporation for many major
corporations, both the legislature and courts in Delaware have demonstrated an
ability and a willingness to act quickly and effectively to meet changing
business needs. The Delaware courts have developed considerable expertise in
dealing with corporate issues and a substantial body of case law has developed
construing Delaware law and establishing public policies with respect to
corporate legal affairs.
Increased Ability to Attract and Retain Qualified Directors. Both Nevada and
Delaware law permit a corporation to include a provision in its charter that
reduces or limits the monetary liability of directors for breaches of
fiduciary duty in certain circumstances. The Company believes that, in
general, Delaware case law regarding a corporation's ability to limit director
liability is more developed and provides more guidance than Nevada law. The
increasing frequency of claims and litigation directed against directors has
greatly
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expanded the risks facing directors of corporations in exercising their
respective duties. The amount of time and money required to respond to such
claims and to defend such litigation can be substantial. It is the Company's
desire to reduce these risks to its directors and to limit situations in which
monetary damages can be recovered against directors so that the Company may
continue to attract and retain qualified directors who otherwise might be
unwilling to serve because of the risks involved.
Well Established Principles of Corporate Governance. There is substantial
judicial precedent in the Delaware courts as to the legal principles
applicable to measures that may be taken by a corporation and as to the
conduct of the Board of Directors under the business judgment rule. The
Company believes that its stockholders will benefit from the well established
principles of corporate governance that Delaware law affords.
No Change in Board Members, Business, Management, Employee Benefit Plans or
Location of Principal Facilities of the Company. The reincorporation achieved
by the Merger will effect only a change in the legal domicile of the Company
and certain other changes of a legal nature, certain of which are described in
this Proxy Statement/Prospectus. The reincorporation contemplated by the
Merger will NOT result in any change in the business, management, fiscal year,
assets or liabilities (except to the extent of legal and other costs of
effecting the Merger) or location of the principal facilities of the Company.
VOTE REQUIRED FOR THE MERGER
Pursuant to the Nevada Law, the affirmative vote of the holders of at least
a majority of the shares of Old ZMAX Common Stock outstanding as of the Record
Date and entitled to vote are required to approve and adopt the Merger
Agreement and the transactions contemplated thereby. At the Record Date, there
were 9,450,514 shares of Old ZMAX Common Stock outstanding. Approval of the
Merger will also constitute approval of the New ZMAX Certificate of
Incorporation and New ZMAX Bylaws.
THE MERGER AGREEMENT
The following is a summary of certain provisions of the Merger Agreement and
related matters. The Merger Agreement is attached at Annex A hereto.
Conversion of Shares. Upon the effectiveness of the Merger, each outstanding
share of Old ZMAX Common Stock will be automatically converted into the right
to receive, upon surrender, one share of New ZMAX Common Stock, and each
outstanding share of New ZMAX Common Stock will be cancelled. Because of the
one-for-one Merger exchange ratio, no fractional shares of New ZMAX Common
Stock will be issued in the Merger.
Exchange of Stock Certificates. From and after the Effective Time, each
share of Old ZMAX Common Stock will be automatically converted into the right
to receive one share of New ZMAX Common Stock. As soon as practicable after
the Effective Time, New ZMAX will send transmittal instructions to each former
Old ZMAX stockholder describing the procedure for surrendering Old ZMAX stock
certificates for New ZMAX stock certificates. COMPANY STOCKHOLDERS SHOULD NOT
SEND IN THEIR STOCK CERTIFICATES UNTIL THEY RECEIVE A TRANSMITTAL FORM.
Conditions to the Merger. The Merger is subject to the satisfaction or
waiver of the following conditions: (i) approval of the Merger by the
stockholders of Old ZMAX, (ii) at least 90% of the Debentures will have been
exchanged in the Exchange Offer and (iii) Warrants issued in the Exchange
Offer for at least 80% of the Warrant Shares will have been exercised at the
exercise price received.
Effective Time. After all the conditions set forth in the Merger Agreement
have been satisfied or waived, the Merger will become effective at such time
as a Certificate of Merger required under the Nevada Law and the Delaware Law
is filed with the Secretaries of State of the States of Nevada and Delaware.
Such filing will be made simultaneously with or as soon as practicable after
the closing of the transactions contemplated by the Merger Agreement.
Termination; Amendment. The Merger Agreement may be terminated or abandoned
by the Board of Directors of Old ZMAX or New ZMAX at any time prior to the
filing of the certificate of merger with the Secretary of State of Nevada or
Delaware. The Board of Directors of Old ZMAX and New ZMAX may jointly amend,
modify and supplement the Merger Agreement in such manner as they may deem
appropriate at any time before approval or adoption of the Merger Agreement by
Old ZMAX stockholders. Any amendment, modification or supplement to the Merger
Agreement after the approval or adoption by the Old ZMAX
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stockholders but prior to the Effective Time of the Merger will require
approval or adoption by the Old ZMAX stockholders. However, approval or
adoption by the Old ZMAX stockholders will not be required with respect to any
amendment, modification or supplement to the Merger Agreement that (i) does not
alter (a) the amount or kind of shares or rights to be received under the
Merger Agreement in exchange for any of the shares of the Old ZMAX Common
Stock, or (b) any term of the New ZMAX Certificate of Incorporation as provided
for in the Merger Agreement, or (ii) otherwise alters any of the terms and
conditions of the Merger Agreement if such alteration would not adversely
affect the holders of the Old ZMAX Common Stock.
INTERESTS OF CERTAIN PERSONS
None of Old ZMAX's directors, director nominees or executive officers have
any material interest in the Merger other than their respective pro rata
interest as a result of their beneficial ownership of Old ZMAX Common Stock. No
option or employee benefit will vest or accelerate as a result of the Merger.
None of Old ZMAX's directors, director nominees or executive officers, directly
or indirectly, hold any Debenture. As of the Record Date, Old ZMAX's current
directors, executive officers and their affiliates owned [1,867,942] shares of
Old ZMAX Common Stock entitled to vote at the Meeting (representing [19.8%] of
the outstanding Old ZMAX Common Stock), and each of such individuals have
indicated their intention to cause these shares to be voted in favor of the
Merger Agreement and the transactions contemplated by the Merger Agreement.
These individuals also hold options for an additional 124,000 shares of Old
ZMAX Common Stock that are currently exercisable. In addition, pursuant to the
Company's Directors Formula Stock Option Plan, one of the Company's director
nominees will be entitled to receive options for 12,000 shares of Old ZMAX
Common Stock upon his election to the Board of Directors, 8,000 of which will
be currently exercisable.
DISSENTERS' RIGHTS
Old ZMAX stockholders who oppose the proposed Merger will have the right to
receive payment for the value of their shares as set forth in Sections 92A.300
through 92A.500 of the Nevada Law attached as Annex D. Such dissenters' rights
will be available only to stockholders of Old ZMAX who (i) before the vote to
authorize the Merger, notify Old ZMAX in writing of their intention to demand
payment for their shares of Old ZMAX Common Stock and (ii) refrain from voting
in favor of the Merger. Voting against the Merger will not constitute notifying
Old ZMAX of the intention to demand payment if the Merger is effectuated.
A stockholder must exercise dissenters' rights for all of the shares that he
or she owns of record. A stockholder who holds shares beneficially, and not of
record, may assert dissenter's rights for the beneficially owned shares only by
submitting a written consent of the stockholder of record along with the
written notice of dissent. A stockholder exercising dissenter's rights with
respect to shares that he or she owns beneficially may not exercise dissenter's
rights for fewer than all the shares held by the owner of record.
Since the vote to authorize the Merger will take place at the Meeting, Old
ZMAX will be required to notify by mail those stockholders who, by virtue of a
timely notice of their intention to demand payment and having refrained from
voting in favor of the Merger, are entitled to payment for their shares
("Dissenters Notices"). Dissenters Notices must be sent no later than ten days
after consummation of the Merger. The notice must (i) state where demand for
payment must be sent, (ii) state when certificates must be deposited, (iii)
state the restrictions on transfer of shares that are not evidenced by a
certificate once demand has been made, (iv) supply a form on which to demand
payment, (v) set a date by which demand must be received, and (vi) include a
copy of the relevant portions of the Nevada Law.
Unless a stockholder acquired his or her shares after Old ZMAX sends the
Dissenters Notices, Old ZMAX must calculate the fair market value of the shares
plus interest, and within 30 days of the date Old ZMAX receives the demand, pay
this amount to any stockholder that properly exercised dissenters' rights and
deposited certificates with Old ZMAX. If Old ZMAX does not pay within 30 days,
a stockholder may enforce in court Old ZMAX's obligation to pay. The payment
must be accompanied by (i) Old ZMAX's interim balance sheet, (ii) a statement
of the fair market value of the shares, (iii) an explanation of how the
interest was calculated, (iv) a statement of dissenters' right to demand
payment, and (v) a copy of the relevant portions of the Nevada Law.
Within 30 days of when the Company pays a dissenting stockholder for his or
her shares, the stockholder has the right to challenge the Company's
calculation of the fair market value of the shares and interest due, and
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must state the amount that he or she believes to represent the true fair
market value and interest of the shares. If the Company and the stockholder
are not able to settle on an amount, the Company may petition a court within
60 days of making payment to the dissenting stockholder. If the Company does
not either settle with the stockholder or petition a court for a determination
within 60 days, the Company is obligated to pay the stockholder the amount
demanded that exceeds the Company's calculation of fair market value plus
interest. All dissenters are entitled to judgment for the amount by which the
fair market value of their shares is found to exceed the amount previously
remitted, with interest.
If beneficial owners of more than 5% of the issued and outstanding shares of
Old ZMAX Common Stock exercise their dissenters' rights, the Company may
determine to abandon the Merger. See "The Merger--The Merger Agreement--
Conditions to the Merger."
CHANGES AFFECTING STOCKHOLDERS
Differences between Nevada and Delaware law will result in certain changes
affecting stockholders. For a discussion of certain significant differences
between Nevada and Delaware law, see "Comparison of Stockholders Rights."
The New ZMAX Certificate of Incorporation that will be adopted as part of
the Merger is substantially similar to the Articles of Incorporation of Old
ZMAX in all material respects, except that the New ZMAX Certificate of
Incorporation will (i) provide for a classified Board of Directors with
staggered terms, (ii) consistent with the Delaware Law, limit the liability to
the Company of only directors, as opposed to the Old ZMAX limitation for both
directors and officers, and (iii) consistent with the Delaware Law, obligate
the Company to indemnify only directors, as opposed to Old ZMAX's obligation
to indemnify officers, employees and agents as well. In this regard, it should
be noted that the New ZMAX Board of Directors retains the discretionary
authority to authorize the indemnification of officers, employees and agents,
subject to certain conditions under the Delaware Law. A copy of the New ZMAX
Certificate of Incorporation is included as Annex B hereto.
The New ZMAX Bylaws that will be adopted as part of the Merger is the same
as the Bylaws of Old ZMAX in all material respects, except that the New ZMAX
Bylaws (i) implement the classified board adopted in the Certificate of
Incorporation, (ii) increase from 10% to 25% the number of issued and
outstanding shares of the Company's common stock that must be beneficially
owned by stockholders seeking to call a special meeting of the stockholders,
(iii) prohibit the stockholders from taking action by written consent, and
(iv) provide certain changes necessary to conform to Delaware law. See
"Comparison of Stockholder Rights." A copy of the New ZMAX Bylaws is included
as Annex C hereto.
FEES AND EXPENSES
The expenses of the Merger, will be borne by the Company. The expenses
include soliciting stockholder approval, offering the Exchange Offer to the
Debenture holders, SEC registration fees, NASD listing fees, and legal,
accounting and printing fees. The solicitation of stockholders and Debenture
holders is being made by mail. However, additional solicitation may be made by
fax, telephone or in person by officers and regular employees or consultants
of the Company.
The total cash expenditures to be incurred by the Company in connection with
the Merger and the Exchange Offer are estimated to be approximately $ .
U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following is a summary of the material U.S. federal income tax
consequences of the Merger to Old ZMAX and its stockholders.
The merger of Old ZMAX into New ZMAX, as described above, will constitute a
tax-free reorganization within the meaning of Section 368(a)(1)(F) of the
Internal Revenue Code of 1986, as amended, (the "Code"). For federal income
tax purposes:
(1) Neither Old ZMAX nor its stockholders will recognize any gain or loss
by reason of the exchange of Old ZMAX Common Stock for New ZMAX Common
Stock, the deemed exchange of the Old ZMAX Warrants for New ZMAX Warrants
(to the extent not exercised prior to the Merger) or the transfer of assets
(subject to liabilities) by Old ZMAX to New ZMAX in connection with the
Merger.
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(2) The shares of New ZMAX Common Stock and Warrants issued as a result
of the Merger in the hands of a stockholder will have an aggregate basis
for computing gain or loss equal to the aggregate basis of shares of Old
ZMAX Common Stock (less that portion, if any, allocable to fractional
shares) and Warrants held by that stockholder immediately prior to the
Merger.
(3) The holding period of the shares of New ZMAX Common Stock and
Warrants issued as a result of the Merger in the hands of a stockholder
will include the period during which the stockholder held the shares of Old
ZMAX Common Stock and Warrants, respectively, prior to the Merger provided
the shares of Old ZMAX Common Stock and Warrants were each held as a
capital asset at the effective time of the Merger.
(4) A stockholder who receives solely cash pursuant to such stockholder's
statutory dissenters or appraisal right will be treated as having received
such payment in redemption of such stockholder's Old ZMAX Common Stock, as
provided in Section 302(a)(1) of the Code. Each affected stockholder is
urged to consult such stockholder's own tax advisor for the effect of such
redemption (i.e., exchange or dividend treatment) in light of such
stockholder's particular facts and circumstances.
The tax analysis and conclusions stated above are limited to certain U.S.
federal income tax consequences of the Merger. Tax consequences to foreign
persons may vary depending on the law of the applicable jurisdiction. Each
stockholder is urged to consult such stockholder's tax advisor to determine
the specific tax consequences of the Merger to such stockholder.
THE EXCHANGE OFFER
The Company is making the following Exchange Offer to holders of Debentures.
TERMS OF THE EXCHANGE OFFER
Old ZMAX hereby offers, upon the terms and subject to the conditions set
forth in this Proxy Statement/Prospectus and the accompanying Letter of
Transmittal, to each holder of Debentures the opportunity to exchange all, but
not less than all, Debentures held for (i) 220 shares of Old ZMAX Common Stock
and (ii) a Warrant to purchase 220 shares of Old ZMAX Common Stock
(collectively, the "Exchange Consideration") for each $1,000 principal amount
of Debentures. No payment or adjustment will be paid in respect of accrued and
unpaid interest from June 1, 1997 (the most recent interest payment date) to
the date of exchange. Tendering Debenture holders will receive the Exchange
Consideration in lieu of any payment in respect of accrued and unpaid
interest. As of the date of this Proxy Statement/Prospectus, $5.5 million
aggregate principal amount of Debentures were outstanding. Assuming all of the
outstanding Debentures are validly tendered and accepted for exchange,
tendering holders of Debentures will receive an aggregate of 1,210,000 shares
of authorized but previously unissued Old ZMAX Common Stock plus Warrants to
purchase an additional 1,210,000 shares of Old ZMAX Common Stock. Pursuant to
the terms of the Debentures and because the Debentures are issued in integral
multiples of $1,000, no fractional shares will be issued in the Exchange
Offer.
The Company presently intends to redeem for cash any Debenture remaining
outstanding following completion of the Exchange Offer at 100% of principal
amount thereof plus any interest accrued thereon to the date of redemption.
The Company anticipates that all of the Debentures will be tendered in the
Exchange Offer because the market price of the Exchange Consideration per
$1,000 principal amount of Debentures exceeds $1,000 and the redemption price.
In addition, as a result of the Merger, Old ZMAX Common Stock received by
tendering holders of Debentures in the Exchange Offer and upon exercise of
Warrants prior to the Effective Time of the Merger would be converted into
shares of New ZMAX Common Stock which would not be "restricted securities"
under the Securities Act. By contrast, the Debentures and Old ZMAX or New ZMAX
Common Stock issuable upon conversion thereof (rather than pursuant to the
Exchange Offer) would be restricted securities.
Old ZMAX has the right, but not the obligation, to waive or amend the terms
of the Exchange Offer or extend the Exchange Offer, provided that any modified
consideration will be provided to all tendering holders, even if they tendered
their Debentures prior to the modification. Any amendment applicable to the
Exchange Offer will apply to all Debentures exchangeable in the Exchange
Offer, regardless of when or in what order such Debentures were tendered.
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PURPOSES AND EFFECTS OF THE EXCHANGE OFFER
The Company is undertaking the Exchange Offer in order to facilitate the
consummation of the restructuring contemplated by the Merger through the
retirement of outstanding debt of the Company, to improve the Company's debt
to equity ratio by decreasing total liabilities, increasing total
stockholders' equity and eliminating approximately $440,000 of annual interest
expense.
Under generally accepted accounting principles, because the Exchange
Consideration includes securities in excess of the securities issuable
pursuant to the original conversion terms of the Debentures, the Company will
be required to recognize as expense the fair value of the securities issuable
upon the exchange of the Debentures in excess of the fair value of the
securities issuable pursuant to the original conversion terms of the
Debentures. Accordingly, the Company will recognize an expense equal to (i)
the fair value of the incremental number of shares of Old ZMAX Common Stock
issued in the exchange in excess of the number of shares of Old ZMAX Common
Stock issuable upon conversion of the Debentures in accordance with their
terms plus (ii) the fair value of the Warrants issued in the exchange. As a
result, assuming all of the Debentures are tendered and accepted for exchange
pursuant to the Exchange Offer, and assuming that the fair market value of the
Old ZMAX Common Stock is $14.375 (the closing price on June 18, 1997 as quoted
on the OTC Bulletin Board) on the date of the exchange, the Company will
recognize an expense of approximately $10.5 million upon consummation of the
Exchange Offer in the third quarter of 1997. Including the effect of that
expense, the net effect of the Exchange Offer would increase stockholders'
equity by $12.2 million. See "Capitalization" and " Unaudited Pro Forma
Financial Data."
EXPIRATION DATE; EXTENSIONS; TERMINATION; AMENDMENTS
The Exchange Offer will expire at 5:00 p.m., Eastern Standard Time, on
September , 1997 [21st business day after commencement], unless the Company,
in its sole discretion, extends the Exchange Offer. During any extensions, all
Debentures previously validly tendered pursuant to the Exchange Offer and not
yet accepted will remain subject to the Exchange Offer (subject to withdrawal
rights specified herein). The later of 5:00 p.m., Eastern Standard Time on
September , 1997, or the latest time and date to which the Exchange Offer may
be extended is referred to herein as the "Expiration Date."
The Company expressly reserves the right, at any time or from time to time,
to extend the period of time for which the Exchange Offer is to remain open.
Any extension or expiration of the Exchange Offer will be followed as promptly
as practicable by the sending of notice of such extension or expiration to the
holders of the Debentures by first class mail, fax or otherwise.
The Exchange Offer may be amended at any time. If the Company makes a
material change in the terms of the Exchange Offer or in the information
concerning the Exchange Offer or if it waives a material condition of the
Exchange Offer, the Company will disseminate additional Exchange Offer
material and will extend the Exchange Offer in each case to the extent
required by law.
The Company reserves the right, in its sole discretion, to terminate the
Exchange Offer at any time prior to the consummation thereof. See "--
Conditions of the Exchange Offer."
PROCEDURES FOR TENDERING DEBENTURES
For the Debentures to be effectively tendered pursuant to the Exchange
Offer, a Letter of Transmittal (or a facsimile thereof) that has been properly
completed and duly executed by the registered holder thereof, and any other
documents required by the Letter of Transmittal, must be received by the
Exchange Agent at its address set forth herein. In order for a holder of the
Debentures to participate in the Exchange Offer, the Debenture holder must
return these documents on or before the Expiration Date. The Letter of
Transmittal should be sent only to the Exchange Agent. See "--Letter of
Transmittal" and "--Exchange Agent and Information Source."
ACCEPTANCE OF DEBENTURES FOR EXCHANGE AND DELIVERY OF THE EXCHANGE
CONSIDERATION
Upon the terms and subject to the conditions of the Exchange Offer,
acceptance of the Debentures validly tendered under the Exchange Offer and not
withdrawn, and delivery of certificates representing the Old ZMAX Common Stock
and Warrants in exchange for the Debentures will be made as promptly as
practicable after the
23
<PAGE>
Expiration Date. The Company, however, expressly reserves the right to delay
acceptance of any of the Debentures or to terminate the Exchange Offer and not
accept for exchange any Debentures not already accepted if any conditions set
forth under "--Conditions of the Exchange Offer" are not satisfied and have
not been waived by the Company. For purposes of the Exchange Offer, the
Company will be deemed to have accepted for exchange validly tendered
Debentures upon execution of a written acceptance thereof. See "--Conditions
of the Exchange Offer."
LETTER OF TRANSMITTAL
The Letter of Transmittal notifies each Debenture holder of the Exchange
Offer and must be completed and returned by the Debenture holder to
participate in the Exchange Offer. The Letter of Transmittal contains, among
other things, the following terms and conditions, which are part of the
Exchange Offer.
The party tendering the Debentures for exchange (the "Transferor") assigns
the Debentures to the Company and irrevocably appoints the Exchange Agent as
the Transferor's agent and attorney-in-fact to cause the Debentures to be
assigned and exchanged. The Transferor represents that it has full power and
authority to tender and assign the Debentures, and that, when the same are
accepted for exchange, the Company will acquire good and unencumbered title to
the tendered Debentures. The Transferor also represents that it will, upon
request, execute and deliver any additional documents requested by the Company
to complete the assignment and exchange of tendered Debentures. All authority
conferred by the Transferor to the Exchange Agent will survive the death,
bankruptcy or incapacity of the Transferor and every obligation of the
Transferor will be binding upon the heirs, personal representatives,
successors and assigns of the Transferor.
CONDITIONS OF THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, the Company is
not required to accept for exchange or, subject to any applicable rules and
regulations of the SEC, exchange any Debentures tendered and may postpone the
acceptance of or, subject to the restrictions set forth above, may terminate
or amend the Exchange Offer if, at any time prior to the time of acceptance
for exchange or issuance of the Exchange Consideration in respect of any such
Debentures (whether or not any other Debentures have already been accepted for
exchange and payment or paid for pursuant to the Exchange Offer), any of the
following events occur:
(a) the holders of the requisite number of shares of Old ZMAX Common
Stock do not approve the Merger Agreement and the transactions contemplated
thereby at the Meeting; or
(b) any change (or any condition, event or development involving a
prospective change) occurs or is threatened in the business, properties,
assets, liabilities, capitalization, shareholders' equity, financial
condition, operations, results of operations or prospects of Old ZMAX or
any of its subsidiaries, or in the general economic or financial market
conditions in the United States or abroad, that, in the sole judgment of
the Company, is or may be materially adverse to Old ZMAX and its
subsidiaries or its stockholders or to the value of the Debentures or the
Old ZMAX Common Stock or there is a significant decrease in the market
prices of or trading in the Common Stock, or the Company becomes aware of
any fact or occurrence which, in the sole judgment of the Company, is or
may be materially adverse with respect to the value of the Debentures or
the Exchange Offer's contemplated benefits to the Company; or
(c) there occurs (1) any general suspension of trading in, or limitation
on prices for, securities on any national securities exchange or the over-
the-counter market, (2) a declaration of a banking moratorium or any
suspension of payments in respect of banks in the United States, (3) a
declaration of a national emergency or a commencement of a war, armed
hostilities or other national or international calamity directly or
indirectly involving the United States, (4) any limitation (whether or not
mandatory) by any governmental or regulatory authority on, or any other
event which in the sole judgment of the Company might affect, the nature or
extension of credit by banks or other financial institutions, (5) any
significant adverse change in the United States securities or financial
markets, or (6) in the case of any of the foregoing existing at the time of
the commencement of the Exchange Offer, in the sole judgment of the
Company, a material acceleration, escalation or worsening thereof; or
24
<PAGE>
(d) any action is taken or threatened, or any statute, rule, regulation,
judgment, order or injunction proposed, sought, promulgated, enacted,
entered, enforced or deemed applicable to the Exchange Offer by any
government or governmental authority or by any court, that, in the sole
judgment of the Company, might, directly or indirectly, (1) make the
acceptance for exchange for some or all of the Debentures illegal or
otherwise restrict or prohibit consummation of the Exchange Offer, (2)
result in a delay in, or restrict the ability of the Company, or render the
Company unable, to accept for exchange some or all of the Debentures, (3)
otherwise adversely affect Old ZMAX or any of its subsidiaries or
affiliates or (4) result in a material limitation in the benefits expected
to be derived by the Company as a result of the transactions contemplated
by the Exchange Offer; or
(e) there is threatened, instituted or pending any action, proceeding or
claim by or before any court or governmental, administrative or regulatory
agency or authority or any other person or tribunal, domestic or foreign,
challenging the making of the Exchange Offer, the acquisition by the
Company of any Debentures, or seeking to obtain any material damages as a
result thereof, or, in the sole judgment of the Company, otherwise
adversely affecting Old ZMAX or any of its subsidiaries or affiliates or
the value of the Debentures or the Old ZMAX Common Stock;
that, in the sole judgment of the Company in any such case, and regardless of
the circumstances (including any action or omission by Old ZMAX or any of its
affiliates or subsidiaries) giving rise to any such condition, makes it
inadvisable to proceed with the Exchange Offer or such acceptance for exchange
of Debentures.
All of the foregoing conditions are for the sole benefit of the Company and
may be asserted by the Company regardless of the circumstances giving rise to
such condition and may be waived by the Company, in whole or in part, at any
time and from time to time, in the sole discretion of the Company. The failure
of the Company at any time to exercise any of the foregoing rights will not be
deemed to be a waiver of any such right, and each such right will be deemed an
ongoing right which may be asserted at any time and from time to time. Any
determination by the Company concerning the foregoing conditions is final and
binding.
If any of the foregoing conditions are not satisfied (or, with respect to
the above enumerated events, has occurred), the Company may, subject to
applicable law, (i) terminate the Exchange Offer and return all Debentures
tendered pursuant to the Exchange Offer to tendering Debenture holders; (ii)
extend the Exchange Offer and retain all tendered Debentures until the
Expiration Date for the extended Exchange Offer; or (iii) waive the
unsatisfied conditions with respect to the Exchange Offer and accept all
Debentures tendered pursuant to the Exchange Offer.
CERTAIN CONSEQUENCES TO TENDERING AND NONTENDERING HOLDERS
The Old ZMAX Common Stock received by tendering holders of Debentures that
are accepted for exchange and upon exercise of Warrants will, as an equity
security, be junior in right of payment to all existing and future
indebtedness of the Company, including Debentures not tendered or not accepted
for exchange, and will also be junior in right of payment to any preferred
stock of the Company which by its terms is senior in right of payment to the
Common Stock. As of the date of the Proxy Statement/Prospectus the Company
does not have any preferred stock outstanding and does not have any plans,
arrangements or understandings regarding the issuance of any preferred shares.
See "Description of Securities." Dividends on the Old ZMAX Common Stock are
payable when, as and if declared by the Board of Directors of Old ZMAX. The
Company has not paid cash dividends on its Common Stock and does not expect to
do so in the foreseeable future. The Company presently intends to redeem for
cash any Debenture remaining outstanding following completion of the Exchange
Offer at 100% of principal amount thereof plus any interest accrued thereon to
the date of redemption.
WITHDRAWAL RIGHTS
All tenders duly and validly made under the Exchange Offer may be withdrawn
at any time on or before 5:00 p.m., Eastern Standard Time, September , 1997.
Holders of Debentures who wish to exercise this right of
25
<PAGE>
withdrawal must give notice of withdrawal in writing or by telegram, telex or
fax, which notice must be timely received by the Exchange Agent at its address
set forth herein. Any notice of withdrawal must specify the name of the person
who tendered the Debentures to be withdrawn and the principal amount of the
Debentures to be withdrawn. The notice of withdrawal must be signed by the
holder of the Debentures in the same manner as the original signature on the
Letter of Transmittal (including any required signature guarantees) or be
accompanied by evidence satisfactory to the Company that the person
withdrawing the tender has succeeded to the beneficial ownership of the
Debentures.
All questions as to the validity (including time of receipt) of notices of
withdrawal will be determined by the Company, in its sole discretion, which
determination is final and binding. Neither the Company nor any other person
will be under any duty to give notification of any defects or irregularities
in any notice of withdrawal or incur any liability for failure to give any
such notification.
EXERCISE OF WARRANTS
Tendering holders of Debentures who exercise their Warrants prior to the
Merger will receive New ZMAX Common Stock in the Merger if the Merger is
approved by the Old ZMAX stockholders. These shares of New ZMAX Common Stock
received by the Debenture holders will generally be freely transferable
without restriction or further registration under the Securities Act, except
that any shares held by "affiliates" of the Company (as defined in Rule 144
under the Securities Act) may generally only be sold in compliance with the
limitations of Rule 144.
Although the Registration Statement of which this Proxy Statement/Prospectus
is a part registers the Warrants and Old ZMAX Common Stock issuable upon
exercise thereof, the Registration Statement will not remain current and in
effect significantly beyond the Effective Time of the Merger. Following the
Effective Time of the Merger, holders of Warrants must provide the Company
with certain representations and documentation relating the availability of an
exemption from the registration requirements of the Securities Act as a
condition to the valid exercise of Warrants. New ZMAX Common Stock issued in
respect of Warrants exercised following the Effective Time of the Merger will
generally be restricted securities. Since New ZMAX Common Stock issued in the
Merger following the exercise of Warrants for Old ZMAX Common Stock prior to
the Merger will generally not be restricted securities, the Company
anticipates that a substantial portion of the Warrants will be exercised prior
to the Effective Time of the Merger and the exchange of at least 90% of the
Debentures and the exercise of the Warrants for at least 80% of the Warrant
Shares are conditions to the Merger.
The Company intends to use the proceeds from the exercise of Warrants for
working capital and general corporate purposes.
TRANSFER TAXES
The holder of the Debenture must pay any transfer taxes applicable to the
transfer and exchange of Debentures for the Exchange Consideration pursuant to
the Exchange Offer. The amount of any such transfer taxes (whether imposed on
the tendering holder or any other person) will be payable by the tendering
holder prior to the issuance of the Exchange Consideration.
U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE EXCHANGE
The following is a summary of the material U.S. federal income tax
consequence of the exchange pursuant to the Exchange Offer. The exchange of
Debentures for Old ZMAX Common Stock and Warrants in the Exchange Offer (the
"Exchange") should qualify as a tax-free recapitalization within the meaning
of Section 368(a)(1)(E) of the Code or as a tax-free conversion of the
Debentures under the authority of Revenue Ruling 72-265 (1972-2 C.B. 222) and
Treasury Regulation Section 1.1001-3(c)(1)(ii) and (2)(ii).
Although the Exchange Offer is structured as a Section 368(a)(1)(E)
recapitalization, the Exchange will constitute a tax-free recapitalization
only if the Debentures constitute securities within the meaning of Section 354
of the Code. The determination of whether a debt instrument constitutes a
security involves a factual inquiry
26
<PAGE>
relating to the nature of the debt. Generally, debt instruments with a
maturity date of less than five years from issuance are less likely to be
characterized as securities absent the presence of other factors indicating
the existence of a proprietary interest in the issuer. Thus, although term is
an important factor, the controlling consideration is more likely to be the
overall evaluation of the debt, degree of participation and continuing
interest in the business, the extent of proprietary interest compared with the
similarity of the note to a cash payment and the purpose of the advances.
Although convertibility of the Debentures into Old ZMAX Common Stock and
Warrants should make the classification of the Debentures as securities more
likely, the three year term of the Debentures may prevent such classification.
In the event the Debentures do not constitute securities under Section 354
of the Code, the Exchange nonetheless should qualify as a tax-free conversion.
Generally, in the absence of a nonrecognition provision under the Code,
Section 1001 of the Code provides that the exchange of property (e.g., the
Debentures) for other property (e.g., Old ZMAX Common Stock and Warrants)
differing materially either in kind or in extent requires gain or loss to be
recognized. Under Revenue Ruling 72-265 and Treasury Regulation Section
1.1001-3, the conversion of a debt instrument into equity of the issuer of the
debt instrument will not result in a taxable exchange for purposes of Section
1001 of the Code where the conversion is pursuant to a conversion privilege
contained in the debt instrument when it was issued. Thus, the receipt of Old
ZMAX Common Stock upon conversion of the Debentures should not constitute a
taxable exchange. The receipt of the Warrants upon conversion of the
Debentures, also should not constitute a taxable exchange provided the
Warrants are deemed to constitute an equity interest in Old ZMAX. Proposed
Treasury Regulations have been issued relating to the receipt as part of a
reorganization, of rights to acquire stock of a party to the reorganization.
The Treasury indicated that although a right to acquire stock is not stock,
such right generally represents a form of investment in the capital structure
of the corporation that justifies nonrecognition treatment of the right as a
security. Based on this rationale and the provisions of Treasury Regulation
Section 1.1001-3, the Warrants received upon conversion of the Debentures
should be deemed to represent a form of investment (equity) in the capital
structure of Old ZMAX and should not result in recognition of gain or loss to
the Debenture holders. Nonetheless, the legal authority regarding this issue
is sufficiently uncertain such that the Warrants may be deemed other property
for purposes of Section 1001 thereby resulting in a taxable exchange with
respect to the receipt of the Warrants. Any gain resulting from the receipt of
the Warrants would constitute capital gain provided the Debentures exchanged
constituted capital assets. Capital gain of a foreign Debenture holder
resulting from receipt of Warrants should not be included in taxable income
unless the gain constitutes U.S. source income which is effectively connected
with a U.S. trade or business or such holder is present in the U.S. for at
least 183 days in the tax year.
Whether the Exchange constitutes a tax-free recapitalization within the
meaning of Section 368(a)(1)(E) of the Internal Revenue Code or a tax-free
conversion under the authority of Revenue Ruling 72-265 and Treasury
Regulation Section 1.1001-3, the following U.S. federal income tax
consequences should result:
(1) Neither Old ZMAX nor the Debenture holders will recognize any gain or
loss by reason of the conversion of Debentures into Old ZMAX Common Stock
and Warrants.
(2) The Old ZMAX Common Stock and the Warrants received by a Debenture
holder upon the Exchange will have an aggregate basis equal to the
aggregate basis of the Debentures held by the Debenture holder immediately
prior to the Exchange.
(3) The holding period of the Old ZMAX Common Stock and the Warrants
issued upon the Exchange will include the period during which the Debenture
holder held the Debentures prior to the Exchange provided the Debentures
were held as a capital asset upon the Exchange.
The tax analysis and conclusions stated above are limited to certain U.S.
federal income tax consequences of the Exchange. Tax consequences to foreign
persons may vary depending on the law of the applicable jurisdiction. Each
Debenture holder is urged to consult such holder's tax advisor to determine
the specific tax consequences of the Exchange to such holder.
27
<PAGE>
EXCHANGE AGENT AND INFORMATION SOURCE
The Company is serving as the Exchange Agent in connection with the Exchange
Offer. All deliveries, correspondence and questions sent or presented to the
Exchange Agent relating to the Exchange Offer and the Letter of Transmittal
should be directed to the address or telephone number set forth below:
By Mail Or By Hand:
ZMAX Corporation
20251 Century Boulevard
Germantown, Maryland 20874
Attention: President
(301) 353-9500 (telephone)
(301) 353-9501 (fax)
All inquiries relating to the Exchange Offer should be directed to Michael
C. Higgins the President of the Company. The Company will provide Debenture
holders with certain information regarding the Exchange Offer, assist
Debenture holders in obtaining copies of the Proxy Statement/Prospectus and
Letter of Transmittal and respond to questions from Debenture holders with
respect to the preparation of the Letter of Transmittal.
28
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1997, (i) on a historical basis; (ii) on a pro forma basis, to give effect
to the Exchange Offer, the full exercise of Warrants issued in the Exchange
Offer and the Merger, and (iii) as adjusted to account for the conversion of
Company debt into equity and issuances of additional shares of Common Stock
since March 31, 1997, as described in Note C.
<TABLE>
<CAPTION>
MARCH 31, 1997
------------------------------------------
PRO FORMA
ACTUAL(A) PRO FORMA(B) AS ADJUSTED(C)
------------ ------------ --------------
<S> <C> <C> <C>
Convertible notes................... $ 2,100,000 $ 2,100,000 --
8% convertible exchangeable
subordinated debentures............ 5,500,000 -- --
Long-term debt, net of current
portion............................ 527,857 527,857 $ 142,857
Stockholders' equity(D)(E)
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,
6,704,072 shares issued and
outstanding actual, 9,124,072
shares issued and outstanding pro
forma, and 11,870,514 shares
issued and outstanding pro forma
as adjusted, 479,801 shares
subject to cancellation
agreements....................... 4,200 6,620 9,366
Additional paid-in capital........ 7,027,764 29,722,477 39,940,278
Issuable common stock(F).......... 5,299,579 5,299,579 --
Receivable for stock
subscription..................... (105,000) (105,000) --
Deficit accumulated during
development stage................ (13,651,082) (24,156,082) (24,520,024)
------------ ------------ ------------
Total stockholders equity......... (1,424,539) 10,767,594 15,429,620
------------ ------------ ------------
$ 6,703,318 $ 13,395,451 $ 15,572,477
============ ============ ============
</TABLE>
- --------
(A) Actual includes 479,801 shares held of record by certain stockholders that
are subject to cancellation agreements with the Company but have not been
surrendered for cancellation. See "Description of Securities--Cancellation
of Certain Shares."
(B) Pro Forma assumes that the Company's Debentures are fully exchanged in the
Exchange Offer for 1,210,000 shares of Old ZMAX Common Stock and Warrants
to purchase an equal number of shares, the full exercise of the Warrants
into 1,210,000 shares at $7 per share of Old ZMAX Common Stock and assumes
that the fair market value of the Company's Common Stock on the date of
the Exchange is $14.375 (the closing price on June 18, 1997 as quoted on
the OTC Bulletin Board). Pro Forma also assumes that the Merger has been
consummated and that no Old ZMAX stockholders exercise their dissenters'
rights. See "The Merger--Dissenters' Rights."
(C) Pro forma as adjusted represents issuances of Old ZMAX Common Stock since
March 31, 1997 (see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Recent Developments"), including (i)
1,600,000 shares issued in April 1997 upon the conversion of the Company's
convertible notes, (ii) 670,000 shares issued in April 1997 in connection
with the CSI transaction, (iii) 234,365 shares issued in April 1997 in
connection with the Company's purchase of Fiserv's interest in the Fiserv
Century Services Joint Venture, (iv) 32,077 shares issued in May 1997 as
satisfaction for a promissory note, (v) 150,000 shares issuable in
connection with the Company's acquisition of the COCACT software, and (vi)
60,000 shares issuable to a consultant for services rendered. For shares
not issued as of June 18, 1997, the closing price of $14.375 on June 18,
1997 is assumed to be the fair market value of the Company's Common Stock
on the date of issuance.
(D) Excludes (i) 208,126 shares of Common Stock issuable upon exercise of
options outstanding as of March 31, 1997 with a weighted average exercise
price of $11.00, (ii) 1,200,000 shares issuable upon exercise of options
granted at $14.31 in April 1997 under the 1997 Stock Incentive Plan of
which options to purchase 100,000 of such shares are currently
exercisable, (iii) 36,000 shares issuable upon exercise of options granted
at $14.06 in May 1997 under the 1997 Directors Formula Stock Option Plan
of which options to purchase 24,000 of such shares are currently
exercisable, (iv) 500,000 shares of Common Stock reserved for issuance to
executives under the Company's bonus program or upon exercise of options
that may be granted under the 1997 Stock Incentive Plan, (v) 84,000 shares
of Common Stock reserved for issuance upon exercise of options that may be
granted under the 1997 Directors Formula Stock Option Plan, and (vi)
12,000 shares issuable upon exercise of options that will be granted to a
director nominee upon such nominees taking office of which options for
8,000 of such shares will be immediately exercisable.
(E) Gives effect to the Merger. The authorized capital stock of the Old ZMAX
consists of 95,000,000 shares of Old ZMAX Common Stock and 10,000,000
shares of preferred stock, of which 5,000,000 shares have been designated
as Series A Preferred Shares. Upon completion of the Merger, the
authorized capital stock of New ZMAX, the surviving corporation of the
Merger, will consist of 50,000,000 shares of Common Stock and 10,000,000
shares of Preferred Stock.
(F) Represents 904,365 shares issuable as of March 31, 1997 pursuant to
agreements existing at March 31, 1997 related to the CSI transaction and
the purchase of Fiserv's interest in the Fiserv Century Services Joint
Venture. See "Notes to Consolidated Financial Statements."
29
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company's Common Stock has been quoted on the OTC Bulletin Board (a
quotation service provided by Nasdaq Stock Market, Inc.) under the symbol
"ZMAX" since August 20, 1996, and under the trading symbols of "MEDO" and
"ORYX" before that date. The stock prices listed below, which have been
adjusted to reflect to the 80 for 1 reverse stock split of the Old ZMAX Common
Stock as of August 27, 1996, represent the high and low closing bid prices of
the Old ZMAX Common Stock, as quoted by the OTC Bulletin Board for each fiscal
quarter beginning with the first fiscal quarter of 1995.
<TABLE>
<CAPTION>
HIGH LOW
-------- ---------
<S> <C> <C>
FISCAL YEAR 1995:
Quarter ended March 31, 1995............................... $ 30.00 $ 10.00
Quarter ended June 30, 1995................................ $ 50.00 $ 10.00
Quarter ended September 30, 1995........................... $ 32.50 $ 7.50
Quarter ended December 31, 1995............................ $ 20.00 $ 2.40
FISCAL YEAR 1996:
Quarter ended March 31, 1996............................... $ 3.995 $ .80
Quarter ended June 30, 1996................................ $ 4.00 $ 1.60
Quarter ended September 30, 1996........................... $ 6.75 $ 1.25
Quarter ended December 31, 1996............................ $ 16.25 $ 5.00
FISCAL YEAR 1997:
Quarter ended March 31, 1997............................... $ 20.00 $ 10.00
April 1 through June [18], 1997............................ $[17.25] $[12.125]
</TABLE>
On June 18, 1997, the last reported bid price of Old ZMAX Common Stock
quoted on the OTC Bulletin Board was $14.25 per share. The foregoing
quotations reflect inter-dealer prices, without retail mark-up, markdown or
commission and may not represent actual transactions. The U.S. trading market
for the Old ZMAX Common Stock has been limited and characterized by
significant price and volume volatility. Old ZMAX has not been subject to the
periodic reporting requirements of the Exchange Act and accordingly current
public information regarding Old ZMAX and its business has not been widely
disseminated by Old ZMAX. As a result of the foregoing, historical price
quotations for the Old ZMAX Common Stock may not be indicative of the
operations, financial conditions or prospects for the Company as evidenced by
Old ZMAX's issuance of Common Stock and Common Stock equivalents in the fall
of 1996 at prices less than the quoted market price at such time. As of July
, 1997, the Company believes there were approximately 124 record owners of
the Company's Common Stock, including shares held by banks, brokers and
depository companies who hold as nominees for numerous beneficial owners.
The Company has not paid any cash dividends on its Common Stock in the past
and does not expect to pay cash dividends in the foreseeable future. The
Company currently intends to retain any future earnings to finance the
development and operation of its business. The Company's future dividend
policy will be determined by the Board of Directors and will depend upon,
among other factors, the Company's earnings, financial condition, capital
requirements, the impact of the distribution of any dividends on the Company's
financial condition and tax liabilities and such other conditions as the Board
of Directors may deem relevant.
30
<PAGE>
SELECTED FINANCIAL DATA
The tables below present selected historical financial data of Old ZMAX. The
Old ZMAX historical data for the period from December 13, 1995 (Date of
Inception) to December 31, 1995 and for the year ended December 31, 1996, are
based on the historical financial statements of ZMAX Corporation as audited by
Arthur Andersen LLP, independent public accountants. On November 6, 1996, Old
ZMAX, 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, the acquisition has been
treated as a recapitalization of CSI with CSI as the acquirer (a reverse
acquisition). The historical financial statements prior to November 6, 1996
are those of CSI. The accompanying consolidated financial statements include
all of the accounts of CSI and the accounts of Old ZMAX for the period from
the acquisition on November 6, 1996, through December 31, 1996. The selected
financial data for Old ZMAX for the three-month periods ended March 31, 1996
and 1997, has been obtained from unaudited financial statements and, in the
opinion of the management of Old ZMAX, include all adjustments necessary to
present fairly the data for such periods. Operating results for the three
month period ended March 31, 1997 are not necessarily indicative of the
results that will be expected for the year ending December 31, 1997. The
information set forth below should be read in conjunction with, "Management's
Discussion and Analysis of Financial Conditions and Results of Operations" and
the historical financial statements and notes thereto included elsewhere in
this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
DECEMBER 13, DECEMBER 13,
1995 (DATE OF 1995 (DATE OF THREE MONTHS ENDED DECEMBER 13,
INCEPTION) TO YEAR ENDED INCEPTION) TO MARCH 31, 1995 (DATE OF
DECEMBER 31, DECEMBER 31, DECEMBER 31, ------------------- INCEPTION) TO
1995 1996 1996 1996 1997 MARCH 31, 1997
------------- ------------ ------------- ------- ---------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Selling and marketing... $ -- $ 228,803 $ 228,803 $ -- $ 157,748 $ 386,551
General and
administrative......... -- 1,087,077 1,087,077 46,814 1,019,195 2,106,272
Amortization and
depreciation........... -- 193,533 193,533 -- 154,730 348,263
Loss from operations.. -- (1,509,413) (1,509,413) (46,814) (1,331,673) (2,841,086)
Other income (expense):
Interest income......... -- 14,248 14,248 -- 49,478 63,726
Interest expense........ -- (7,125,386) (7,125,386) -- (889,446) (8,014,832)
Other................... -- (2,903,600) (2,903,600) -- 1,218 (2,902,382)
Income tax benefit...... -- 17,396 17,396 -- 26,096 43,492
Net loss.............. -- (11,506,755) $(11,506,755) (46,814) (2,144,327) $(13,651,082)
Net loss per share.... $ -- $ (13.45) $ (0.12) $ (0.63)
Weighted average
number of common
stock shares
outstanding.......... 400,000 855,712 400,000 3,424,271
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1996 MARCH 31, 1997
-------- ----------- --------------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............... $ -- $ 4,842,169 $ 3,731,416
Working capital (deficit)............... (110,000) 2,725,534 986,650
Total assets............................ 110,000 9,096,530 7,836,589
Total liabilities....................... 110,000 8,676,742 9,261,128
Deficit accumulated during the
development stage...................... -- (11,506,755) (13,651,082)
Total stockholders' equity (deficit).... -- 419,788 (1,424,539)
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PRELIMINARY NOTE REGARDING FORWARD LOOKING STATEMENTS
The information set forth in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and in "Risk Factors" and
"Business" includes "forward-looking statements" within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act. Factors that
could cause results to differ materially from those projected in the forward-
looking statements are set forth in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" below and in "Risk Factors."
OVERVIEW
On November 6, 1996, Old ZMAX, a shell company listed on the OTC Bulletin
Board incorporated in Nevada, acquired all of the outstanding stock of CSI.
Prior to this transaction, Old 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. For
financial reporting purposes, the acquisition has been treated as a
recapitalization of CSI with CSI as the acquirer (a reverse acquisition). The
historical financial statements prior to November 6, 1996 are those of CSI.
CSI markets millennium services to a variety of commercial and government
organizations. See "Business." In the next 12 months, the Company intends to
make additional investments in the further development and marketing of CSI's
millennium services and other software re-engineering services. In addition,
the Company currently intends to pursue acquisitions in the information
technology industry that will complement CSI.
In view of the development costs relating to CSI's millennium services, 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 CSI increases its workforce in order to
meet future demand for its millennium services, it will incur training, salary
and other costs prior to the recognition of related revenues. In addition,
most of CSI's revenues are expected to be derived from a relatively small
number of large-scale, comprehensive millennium conversion projects provided
by CSI and its strategic partners. Consequently, CSI's revenues and operating
results are expected to be subject to substantial variations in any given year
and from quarter to quarter. See "Risk Factors--Uncertain and Undeveloped
Market for Millennium Services."
The Company believes some demand for CSI's millennium services may continue
to exist for some time after the year 2000, although this demand will diminish
significantly over time and will eventually disappear. However, the Company's
proprietary tools may be used in conversion projects unrelated to Year 2000
compliance. The Company plans to pursue businesses and business opportunities
unrelated to the millennium 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. However, there can be no assurance that the Company will
be able to successfully expand its business beyond the millennium conversion
market. The failure to diversify and develop additional products and services
could materially and adversely affect the Company's business, operating
results and financial condition. See "Risk Factors--Need to Develop Additional
Products and Services."
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 and benefits, travel, promotions and
trade show expenses, office expenses and other general overhead costs.
Amortization and depreciation expense relates to property and equipment and
intangibles assets. As a result of its plan to expand its operations and to
offer a wider range of information services, the Company expects these costs
to increase.
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Margins for the Company's millennium services business will depend upon
volume of service because a significant portion of the Company's cost
structure is fixed. Most of the Company's millennium conversion projects are
expected to be priced on a fixed fee basis. Therefore, the profitability of an
individual project will depend upon completing the project within the
estimated number of staff hours and within the agreed time frame.
CSI RECAPITALIZATION
Old ZMAX purchased all of the outstanding shares of CSI stock pursuant to a
stock purchase agreement between the CSI shareholders and Old ZMAX dated
November 6, 1996 (the "Stock Purchase Agreement"). The combination of CSI and
Old ZMAX has been accounted for as a recapitalization of CSI, a reverse
acquisition in which CSI, a private operating company acquired ZMAX, a shell
company listed on the OTC Bulletin Board. The former CSI stockholders (the
"Former CSI Stockholders") effectively entered into an agreement with the
transaction promoters to raise debt and equity capital through offshore
placements using ZMAX as the vehicle. As part of that process, the interest of
Fiserv in the Year 2000 business (through its joint venture interest) was
reacquired (as described below) and a stock performance compensation plan was
put in place for the Former CSI Stockholders who continued as employees of CSI
(as described below).
At the closing on November 6, 1996, Old ZMAX issued 3,200,000 shares of Old
ZMAX Common Stock in the name of the Former CSI Stockholders, of which 400,000
shares were delivered to the Former CSI Stockholders. The remaining 2,800,000
shares (the "Escrowed Stock") were placed in escrow subject to quarterly
release based on the cash flows generated by CSI. One share of Escrowed Stock
will be released from escrow for each $1.25 of cash flow generated. The Former
CSI Stockholders are entitled to vote the Escrowed Stock and to receive their
respective pro rata share of any distributions or dividends on the Escrowed
Stock. The Escrowed Stock is subject to forfeiture if the Former CSI
Stockholder's employment agreement with CSI is terminated for cause or if the
Former CSI Stockholder breaches any non-compete or other restrictive covenant
with CSI. As of June 18, 1997, no Escrowed Stock had been released from
escrow.
In connection with the CSI transaction, the Former CSI Stockholders entered
into a stockholders' agreement with the Company dated November 6, 1996 (as
amended, the "Stockholders Agreement"). Under the Stockholders Agreement, the
Former CSI Stockholders may not sell, pledge, encumber, give, bequeath, or
otherwise transfer or dispose of their Old ZMAX stock without complying with
the terms of the agreement or obtaining the prior written consent of the
Company. A Former CSI Stockholder who receives a qualified offer (as defined
in the agreement) must notify the Company of the offer and the Company has an
option to elect to purchase the stock under the terms contained in the
qualified offer. The Former CSI Stockholders are not required to comply with
the provisions described above in order to effect a sale or disposition of
their stock made in compliance with SEC Rule 144 under the Securities Act.
At the time of the CSI recapitalization, the Former CSI Stockholders were
also employed by the Company under employment agreements with CSI. If the
employment of the Former CSI Stockholder is terminated for cause (as defined
in the employment agreement) or if following the termination of the employment
agreement, the Former CSI Stockholder is determined to have breached any non-
competition covenants or other restrictions in his employment agreement, the
Company will have an option to elect to purchase the stock at its current
value (as defined in the Stockholders Agreement). If the employment of the
Former CSI Stockholder is terminated for a reason other than for cause,
excluding expiration of the employment agreement by its terms, or if the
employee becomes permanently disabled, the stockholder will offer its stock
for sale to the Company at a price designated by the offering Former CSI
Stockholder and the Company will have an option to elect to purchase the stock
at the offer price or, if the Former CSI Stockholder fails to designate a
price, the current value price (as defined in the Stockholders Agreement).
In the event that a Former CSI Stockholder dies, the Company will have the
option to purchase and the Former CSI Stockholder's estate will be required to
sell all of the stock at the current value price (as defined in
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<PAGE>
the Stockholders Agreement). Any Escrowed Stock subsequently received by a
Former CSI Stockholder's estate will be subject to this provision at the time
of earn out.
Under the terms of the Stockholders Agreement, the stock may only be offered
for sale, sold or transferred pursuant to an effective registration under the
Securities Act or an exemption therefrom. The transfer restrictions, and
purchase options granted in the Stockholders Agreement last for a term of
three years from the date of the agreement and will expire on November 6,
1999. The restrictions apply to any additional shares of Old ZMAX stock
acquired after the execution of the Stockholders Agreement. There are
currently 3,200,000 shares of Old ZMAX Common Stock subject to the
Stockholders Agreement.
In the Stock Purchase Agreement, the Former CSI Stockholders agreed to
indemnify the Company for breaches of the representations and warranties made
to the Company in that agreement. In order to secure their indemnification
obligations, each Former CSI Stockholder pledged the shares of Old ZMAX Common
Stock, including the Escrowed Stock, received by him in the CSI transaction
Acquisition in favor of the Company pursuant to a stock pledge and security
agreement dated November 6, 1996 (the "Stock Pledge Agreement"). In the event
the Company incurs losses as a result of a breach of a representation or
warranty made by the Former CSI Stockholders, the Company is authorized to
transfer, cancel or liquidate the Old ZMAX Common Stock registered in the name
of the Former CSI Stockholders to offset its losses. The term of the Stock
Pledge Agreements expires on August 6, 1997, at which time the certificates
representing the Escrowed Stock will continue to be held in escrow subject to
earn out as described above.
As part of the CSI recapitalization, Old ZMAX acquired the interests of
Fiserv, Inc. in the Fiserv Century Services Joint Venture. See "The Company."
As part of this joint venture acquisition, Old ZMAX agreed to issue to Fiserv
3% of the shares of Old ZMAX outstanding on the closing date of the CSI
recapitalization, or 234,365 shares, and to allow Fiserv to appoint a member
to the Old ZMAX Board of Directors. The issuance of these shares to Fiserv was
completed in April 1997.
With funding from the Company, CSI is now implementing its business plan and
marketing campaign. See "Business." In the next 12 months, the Company intends
to make additional investments in the further development and marketing of
CSI's millennium services as well as investigating related acquisitions in the
information technology industry that will complement CSI.
RECENT DEVELOPMENTS
Conversion of $2.1 million Notes. From September 1996 to November 1996, the
Company issued a total of $2.1 million in convertible notes that were due in
January and March of 1997. The notes were convertible, at the option of the
holder, into a total of 1,600,000 shares of the Company's common stock. Of the
total, $600,000 of the notes were convertible at a rate of one share per $1.00
of principal. The remaining $1,500,000 were convertible at a rate of one share
per $1.50 of principal. All holders of the convertible notes notified the
Company of the exercise of their conversion rights in early 1997, prior to the
due dates of the notes. In March 1997, the Board of Directors approved the
conversion and, in April 1997, all $2.1 million of convertible notes were
converted into an aggregate 1,600,000 shares of Old ZMAX Common Stock.
Issuance of Finders Fee Shares. In connection with the CSI transaction and
related financing, Old ZMAX agreed to issue 320,000 shares of Old ZMAX Common
Stock to Shafiq Nazerali as a fee for his services. At the direction of Mr.
Nazerali, these shares were issued to Valorinvest Ltd. in April 1997. Old ZMAX
also agreed to grant 350,000 shares of Old ZMAX Common Stock to the original
finder of the CSI transaction for $0.30 per share in order to acquire such
finder's rights to the transaction. These shares were issued and the
consideration received in May, 1997.
Conversion of Fiserv Debt. As part of the CSI recapitalization, the Company
acquired the interest of Fiserv, Inc. in the Fiserv Century Services Joint
Venture in exchange for, among other consideration, Old ZMAX's promissory note
for $385,000. This promissory note has been converted into 32,077 shares of
Old ZMAX Common Stock issued to Fiserv, Inc. in May 1997.
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<PAGE>
Acquisition of COCACT Software. On April 30, 1997, Old ZMAX entered into an
agreement with Taiwan's Institute for Information Industry to purchase all
right, title and interest to the Change of Century Analysis and Conversion
Tool (COCACT) software program, an integral part of CSI's VISION 2000(SM)
solution. Conditions of the purchase agreement included a three month software
development and enhancement project to bring COCACT to the required level of
performance. The purchase price for the COCACT software is $1.1 million in
cash plus 150,000 shares of Old ZMAX Common Stock issuable upon completion and
testing of certain COCACT enhancements to be performed by the seller. The
first installment of the purchase price in the amount of $250,000 was paid in
May 1997, and future installments, as well as the issuance of the shares, will
be made after the software development and enhancement project is completed
and tested.
RESULTS OF OPERATIONS
Prior to the CSI transaction, Old ZMAX was a development stage company whose
purpose was to create a vehicle to obtain capital and to seek out,
investigate, and acquire interests in products, properties and businesses that
may have potential for profit. From the date of its inception (April 24, 1986)
through December 31, 1995, Old ZMAX had incurred a cumulative loss of $1.7
million. As of December 31, 1995, Old ZMAX had no assets and liabilities of
$1.4 million.
For financial reporting purposes, the CSI transaction has been treated as a
recapitalization of CSI with CSI as the acquirer (a reverse acquisition). The
historical financial statements including the results of operations prior to
November 6, 1996 are those of CSI.
CSI is a development stage company that was formed on December 13, 1995. Its
1995 activities were limited to acquiring the rights to two of its software
tools. In 1996, the Company incurred a loss of $11.5 million or $13.45 per
share. No revenues were generated in 1996. Included in the 1996 loss were
several significant non-cash charges including approximately $2.9 million of
expense related to the CSI transaction, approximately $7.0 million in interest
charges related to the amortization of the discount on the Company's
convertible debt that resulted from an allocation of the proceeds of the debt
to additional paid-in capital to reflect the beneficial conversion feature on
the convertible debt, approximately $380,000 in amortization of intangibles
and deferred financing costs, and approximately $300,000 in non-employee stock
compensation expense. The remaining expenses are primarily attributable to the
salaries and benefits paid to the Company's technical, marketing and
administrative personnel along with other marketing and administrative
expenses.
Results for the three months ended March 31, 1996, were a loss of $46,814 or
$0.12 per share. The loss was primarily related to the commencement of
operations by CSI in early 1996. Results for the three months ended March 31,
1997, were a loss of $1.3 million or $0.63 per share. No revenues were
generated in either quarter. Included in the 1997 loss were several
significant non-cash charges. Approximately $590,000 in interest charges were
recorded related to the amortization of the discount on the Company's $2.1
million convertible notes that resulted from an allocation of the proceeds of
the debt to additional paid-in capital to reflect the beneficial conversion
feature on the debt. Approximately $297,000 in amortization of intangibles and
deferred financing costs was recorded. Approximately $300,000 in non-employee
stock compensation was charged to expense. The remaining loss reflects the
costs related to the increased operations of CSI and fees and expenses
associated with the preparation of documents in connection with the Merger,
the Exchange Offer and the transactions contemplated thereby. Current assets
totaled $3.7 million, a decrease of $1.2 million from December 31, 1996,
attributable to a decrease in cash that was used for operations and for the
purchase of property and equipment and payment on the Company's long-term
obligation related to its purchase of the COCACT software tool.
LIQUIDITY AND CAPITAL RESOURCES
As part of the recapitalization of CSI, Old ZMAX, prior to the CSI
transaction, sold 2,800,000 shares of Common Stock for $0.30 per share or
$840,000 in the aggregate. The proceeds were used to satisfy outstanding
liabilities of Old ZMAX. Also as part of the recapitalization of CSI, Old
ZMAX, prior to the recapitalization issued $1.5 million of convertible notes
for cash. A portion of the proceeds was used to satisfy outstanding
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<PAGE>
liabilities of Old ZMAX. In addition, prior to the CSI transaction, Old ZMAX
issued a $480,000 convertible note as satisfaction for certain liabilities of
Old ZMAX. Subsequent to the CSI transaction, the Company issued an additional
$120,000 in convertible notes for cash. In early 1997, the holders of the
convertible notes exercised their conversion rights and the $2.1 million in
aggregate convertible notes were converted into a total of 1,600,000 shares of
Common Stock. In December 1996, the Company issued $5.5 million in convertible
exchangeable subordinated debentures for cash. As of December 31, 1996 and
March 31, 1997, the Company had approximately $4.9 million and $3.7 million in
cash, respectively, and $2.7 million and $1.0 million of working capital,
respectively.
The nature of the information technology industry, combined with the rapidly
growing demand for Year 2000 services worldwide, makes it difficult for the
Company to predict future liquidity requirements with certainty. However, the
Company believes that existing cash, together with the proceeds from the
exercise of the Warrants (see "The Exchange Offer"), will be adequate to
finance continuing operations, investments in property and equipment, and
expenditure for the development of additional software improvements in the
Company's VISION 2000(SM) toolset.
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 of cash. See "Business." 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.
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<PAGE>
BUSINESS
INTRODUCTION
The Company focuses on acquiring, building and operating companies in the
information technology industry. In 1996, the Company acquired all of the
stock of CSI. See "The Company." CSI intends to provide re-engineering and
information processing services to users of large-scale computer systems in
North America and Europe. CSI specializes in assisting business organizations
and government agencies with what has become popularly known as the "Year 2000
problem." Over the next several years, CSI expects to devote substantial
resources to assisting its clients in preparing for and implementing the
conversion of their computer systems to allow those clients to continue
operations without interruption in the 21st Century.
CSI's management purchased a suite of software tools from Integrated
Microcomputer Systems, Inc., a sixteen year old software re-engineering firm.
Prior to CSI's acquiring rights to these tools, this software suite has been
used in a number of software re-engineering projects. CSI enhanced the tool
suite to specifically address the Year 2000 problem. CSI's total system
solution, known as VISION 2000SM, encompasses a management methodology,
assembly-line processes, and a proprietary automated tool suite to identify
and convert date-sensitive software applications to Year 2000 compliance.
As a small, start-up company, CSI has only limited resources to undertake a
substantial marketing effort. Consequently, CSI's management has endeavored to
form strategic alliances and teaming agreements with major partners who are
interested in providing value-added services to their existing client base. To
date, CSI has entered into alliances with the Institute for Information
Industry (Taiwan), EDS Federal, Hewlett Packard, Hitachi Data Systems, and
First Technology Solutions.
THE YEAR 2000 PROBLEM
Throughout most of the history of computer data processing by business and
government, data storage was severely limited both by the design shortcomings
of the storage media themselves and by memory access speed considerations.
Consequently, computer programmers typically encoded years using a two digit
format (e.g., "97" for "1997") rather than a complete, four digit format.
However, the use of a two-digit format makes it impossible to distinguish
between dates in different centuries. Programs required to process a date
after the Year 2000 may interpret the date as 100 years earlier than the
intended date (e.g., 1905 for 2005); may go to an arbitrary default date such
as 1985; or may fail to process the date altogether. Even though a particular
program may have the ability to accommodate a 21st Century date, it may be
unable to communicate that date to other application programs with which it
must interact. As the Year 2000 approaches, a number of these programs have
begun to operate inaccurately, or have failed completely, due to their
inherent inability to properly interpret dates beyond 1999.
Many industry analysts see no precedent to the Year 2000 problem, given our
society's increasing reliance on computing devices and automated
communications networks. Indeed, the very size and complexity of computing
applications makes the Year 2000 problem as much a management issue as a
programming one. Large mainframe applications, 10 to 20 years old, are
referred to as "legacy systems" because they have outlived generations of
programmers. Such systems have patch upon patch of code developed by this
succession of programmers, and limited accurate documentation. In some cases,
the original source code bears little or no resemblance to the object code in
the current production environment or the original code is missing altogether.
This is problematic because source code must match the object production code
before Year 2000 remediation can be effective.
Until recently, many organizations have been able to perform specific tasks
that rely on dates after 1999 by using stand-alone Year 2000 compliant
applications, modifying small amounts of computer code or simply manually
manipulating data. Such solutions are no longer practical as the percentage of
an organization's applications encountering dates after 1999 increases. As the
millennium draws nearer, more and more applications will be at risk.
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Because a single application can potentially corrupt an organization's
entire information network by passing on non-compliant data, resolving the
Year 2000 problem requires individual identification and analysis of all
applications and systems used by the organization. An organization's systems
may include internally developed custom mainframe programs and a large number
of new applications from multiple sources, leading to an absence of standards
among highly integrated and interdependent applications. Changes to
applications may require a corresponding change to the data used by those
applications. Computer hardware and operating systems generally include date-
sensitive programs or processing functions that can be similarly affected.
The Year 2000 problem affects not only data processing functions but also
process control applications. For example, applications such as traffic
regulation, environmental control and factory automation commonly change
programs by date. While these systems are not typically affected by the Year
2000 problem today (as they have no current need to process dates
substantially in the future), as the millennium approaches, many of these
process applications will have to be reprogrammed to allow them to function
after the Year 2000.
The extensive reliance of business firms and government agencies upon
computer-based information systems makes it critical for those organizations
to assess and correct their Year 2000 problem within the next 2 1/2 years.
Many organizations will analyze and modify their existing systems because it
may be very difficult for them to abandon existing systems and replace them
with new Year 2000 compliant systems within the limited time available. And,
besides problems arising in its own systems, an organization may be directly
affected by the date-dependent programs and databases used by outside
organizations. For example, suppliers may have software applications that are
directly integrated with a manufacturer's real-time purchasing application.
With the explosive growth in electronic data interchange (EDI), electronic
funds transfer (EFT) and other forms of electronic commerce, the dimensions of
the Year 2000 problem become compounded.
THE MARKET
The Year 2000 problem is particularly important to large organizations with
mainframe computer systems such as banks, securities firms, insurance
companies, healthcare providers, transportation companies, and the full
spectrum of federal, state and city government agencies. Solving the Year 2000
problem is essential in order for these organizations to continue to operate
without interruption into the 21st Century. In some cases, the survivability
of a firm or agency may depend upon its ability to resolve the Year 2000
problem.
An average business mainframe computer may consist of approximately 10
million lines of software code. To manually inventory, analyze, convert, test
and integrate even that modest volume of code would take several years to
complete. The majority of the software code is written in the COBOL language,
which is now considered to be an obsolete language, or in other antiquated
languages such as Assembler. To compound the problem, industry experts have
stated that there are insufficient COBOL programmers and programmers trained
in assembler languages to manually resolve the Year 2000 problem. There are
currently estimated to be only 500,000 COBOL programmers worldwide. Many
programmers trained in COBOL have either retired or have been retrained in
more modern software languages and are reluctant to go back to COBOL
programming for the resolution of the short term Year 2000 problem.
The Gartner Group, a leading information technology consulting company,
estimates that the world-wide cost of resolving the Year 2000 problem is
between $300 billion and $600 billion and that a typical Fortune 500 company
could incur expenses of $50 million to $100 million to resolve its Year 2000
problem.
The Company believes that many organizations will initially attempt to
resolve the Year 2000 problem internally. Others may simply (and expensively)
eliminate and replace programs and equipment. However, the Company believes a
large number of organizations will choose to engage a millennium services
provider to manage some or all of their conversion project. The reasons this
should occur include the substantial increase in technical personnel required
as well as the shortage of programming expertise as noted above. Some industry
analysts including The Gartner Group have suggested that the magnitude of the
Year 2000 problem--and the
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limited time in which to implement a solution--may cause demand for millennium
services to exceed the availability of qualified providers. The market
reaction to the Year 2000 problem has been slow in developing which may result
in the resource demand peaking in late 1998 and 1999. This may lessen the
amount of time the Company will be able to provide its millennium services to
potential clients.
STRATEGY
The Company's objectives are: (1) initially to maximize growth in sales of
its millennium services while achieving high profit margins on these sales and
(2) over the long term, to leverage its assets (including its expertise and
client relationships) obtained through providing its millennium services to
develop additional business opportunities in the re-engineering and conversion
industry and related areas. The Company's strategy for achieving these
objectives includes the following key elements:
Achieve Market Penetration Through Strategic Partnerships. To maximize
revenues, the Company is teaming with well-established strategic partners such
as large software developers, system integration companies, and systems
manufacturers. These strategic partners provide broad name recognition, market
position, marketing resources, large project management expertise, and a
large, well-trained work force. By combining the Company's millennium services
with the expertise and resources of its strategic partners, the Company
believes that the teaming arrangements will provide the customer with
superior, comprehensive millennium conversion solutions. Teaming with
strategic partners should also enable the Company to achieve broader market
penetration for its millennium services by capitalizing on the existing client
relationships and ongoing sales and marketing efforts of its strategic
partners in various markets.
Maintain Technological Leadership. The Company intends to conduct research
and development activities in order to improve the functionality, flexibility,
ease of use and cost-effectiveness of its millennium solution. The Company
works closely with its strategic partners and customers to develop new
features and methodologies to meet their requirements. The Company intends to
continue to independently market and deliver a number of comprehensive
millennium conversion solutions to enhance sales revenue, to gather market
information, and to gain the necessary expertise to continually improve its
technology and services.
Distinguish the Company as a Full Service Provider of Millennium
Services. The Company has developed methodologies for analyzing and re-
engineering information systems under a wide variety of scenarios. The Company
intends to market this expertise, which enables the Company to provide the
full range of services typically necessary to manage a client's entire Year
2000 project, including inventory analysis, impact assessment, strategic
planning, conversion, testing and implementation to production. The Company
believes that few Year 2000 solution providers can match the depth, accuracy
and quality of CSI's full service solution.
Penetrate Additional Geographic Markets. Initially, the Company has targeted
the United States market for its millennium services to be followed by
penetration of selected parts of the Western European market. The Company may
pursue opportunities in other geographic areas either directly or through its
strategic alliances, although no specific plans for such expansion have been
developed.
Pursue Additional Business Opportunities. The Company intends to pursue
additional business opportunities in the conversion industry and related areas
utilizing its software tools, experience, and client relationships obtained
while providing millennium services. The Company believes that, while
performing millennium conversions, it will discover new information systems
requirements, such as migrating a client's application from a mainframe
environment to a client server environment or developing enhancements to a
client's existing applications. In turn, the Company will strive to develop
and market new services and software to meet those requirements.
MILLENNIUM SERVICES
There are no shortcuts to solving the Year 2000 problem. It requires a
comprehensive and rigorous management approach together with a set of
integrated automated tools. The Company believes that its VISION 2000SM
solution encompasses dependable proprietary tools, methodology and processes
to convert legacy
39
<PAGE>
software applications to Year 2000 compliance. VISION 2000(SM) consists of two
phases: Phase 1, Global Impact Analysis (GIA), and Phase 2, Conversion and
Implementation (C&I). Each phase is further divided into 3 steps that are
described below.
VISION 2000(SM)--Global Impact Analysis
CSI recognizes that achieving Year 2000 compliance is a management issue
rather than a purely technical issue. Massive software changes must be managed
in a consistent, cohesive and timely manner with minimum cost, interruption
and risk to the organization. CSI's VISION 2000(SM) Global Impact Analysis (GIA)
is designed to provide its clients with detailed and rigorous analysis,
assessment and planning tools. The Company believes that these three elements
are the cornerstones of a successful Year 2000 conversion.
The first step of the GIA phase is the inventory analysis. During this step
the source code of the client's applications systems--including JCL/ECL,
source library, copybook, file definitions, macros, etc.--are gathered for
detailed analysis. The primary functions of the inventory analysis are
designed to validate the completeness of the source code and to define the
domain of the conversion project. CSI uses its proprietary tool, VISION 2000(SM)
Baseline Inventory Control (BIC) to accomplish these functions. BIC is a
robust, mature, menu-driven, Windows 95-based software tool that is designed
to parse source code into component objects and identify all data-flow and
control-flow relationships among systems, subsystems and program modules. BIC
is designed to identify missing or overlapping source modules to be reported
and addressed with the client. BIC also generates statistical reports,
reference reports and application analysis reports. In addition, the results
from its complexity analysis will become one of the input parameters to VISION
2000(SM) Strategic Planner (described below) for schedule and resource planning.
The second step of the GIA phase is the Year 2000 date impact analysis.
VISION 2000(SM) utilizes three levels of naming patterns to identify potential
date data. It uses CSI's extensive library of generic name patterns at the
enterprise level; a project development naming standard (if available) at each
application; and any unique program specific naming conventions at the
program-module level. During the data gathering and candidate field
confirmation processes, CSI collects information about the physical
characteristics and semantic attributes of each primary date candidate. These
candidates become the initial seed from which the VISION 2000(SM) proprietary
algorithm performs global data-flow analysis and computes equivalent classes
of date-related objects. Data-flow analysis is performed at both the program
module level, which identifies all date field data flow propagations, and at
the global level, which identifies all date field usages in subroutine
parameters or global common data objects (e.g., fields, databases). The
evaluation of the data flow analysis is crucial since during the conversion
phase a conversion rule is assigned and executed to affect changes while at
the same time maintaining semantic integrity of the source code. The VISION
2000(SM) Date Analyzer is designed to target the identification of date and
date-related data from the collection of seeds and produces reports that
detail date-impacted information, including the number of date candidates,
date-related occurrences and the density of date-related occurrences within
each programming unit.
The third step of the GIA phase is the development of the strategic plan to
achieve Year 2000 compliance. This includes a series of assessments that
provide conversion alternatives, comprehensive test criteria and
recommendations for each critical decision point. CSI documents each strategic
decision made by the client in a comprehensive strategic plan. During
strategic planning, a date conversion strategy (e.g., expansion, compression
or windowing) must be selected for each subsystem and each major file or
database. Decisions must also be made concerning the conversion of active and
archive files and databases, including when the conversion will take place.
Next, a test strategy must be selected. Testing can only uncover errors but
would never be able to certify the application is error free. Therefore, a
test strategy must be selected to maximize the end user's confidence,
demonstrate conversion quality and balance the cost versus the risk.
All the information gathered during these three steps of the GIA is entered
into the VISION 2000(SM) Strategic Planner to produce a project implementation
plan. This plan details the schedule, resource requirements, conversion
processes, testing processes, responsibilities and costs to execute the Year
2000 implementation plan.
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<PAGE>
VISION 2000(SM)--Conversion and Implementation
The Company believes that its VISION 2000(SM) conversion and implementation
process is an integrated combination of effective, secure and efficient
automated tools and methodologies working in concert designed to produce
consistent, high quality conversion results. The VISION 2000(SM) Y2K Converter
was designed and developed specifically for Year 2000 conversion tasks. The
VISION 2000(SM) Y2K Converter is a rule-based toolset that runs on Windows 95
workstations networked to an NT server. It is designed to convert numerous
platforms of COBOL (IBM, UNISYS, DEC, HP, WANG, etc.) and PL/1 source code. The
Y2K Converter operates in two modes of conversion: global mode and interactive
mode. During global mode conversion, all source components which directly or
indirectly reference a common global date object are modified in unison. The
interactive mode is used when human intervention is required. In the
interactive mode, a programmer browses the color-coded source code and follows
the recommendation provided by the Y2K Converter. Through the use of function
keys, the programmer executes the changes, minimizing or eliminating the
potential for human error in keyboarding. Whenever a line of source code is
modified, VISION 2000(SM) automatically duplicates the original source line,
marks the original as a comment, and modifies the duplicated line. At the same
time, it "audit stamps" the new line with information indicating who performed
the change, what rules were followed, and when the change was executed.
After conversion, the next step is to verify that the converted application
behaves correctly through a series of tests. CSI's testing methodology and
philosophy is to employ, to the maximum extent possible, the test tools, test
cases, and testers already used by the client. CSI test staff and the client's
test personnel together perform the following tests:
. Regression Test: This test is designed to ascertain whether all functions
of the applications work in the intended manner after the conversion.
. Future Date Test: This test is designed to detect potential errors that
may exist when the date format is changed to a four-digit format. This is
similar to the regression test except that the test data are conditioned
to occur in the future.
. Century Cross Over Date Test: This test is designed to compare
transactions and records that occur at the end of 1999 and cross over
into 2000.
. Integration Test: This test is designed to uncover any error that is not
apparent in each individual component.
Before the successfully tested application is placed back into production,
CSI uses its bridge generator to create temporary or permanent bridges to the
client's application. Bridges are required to provide a transparent and
consistent data view of the modified date fields to the converted application,
as well as to any yet-to-be converted portion of the application software.
VISION 2000(SM) Baseline Inventory Control is designed to define the scope of
a Year 2000 project. VISION 2000(SM) Date Analyzer attempts to identify every
occurrence of date and date-related objects within an application system.
VISION 2000(SM) Date Converter works to apply consistent, rule-based conversion
that minimizes commission errors. The VISION 2000(SM) solution is designed to
produce quality output and thus reduce the testing effort.
MARKETING
The Company has initiated a multi-faceted marketing plan to ensure the market
place is aware and knowledgeable of the Company's millennium services.
Internet. The Company maintains a site on the Worldwide Web and is also
listed on the Year 2000 Home Page, which automatically links back to the
Company's web site. Potential clients seeking Year 2000 compliance support can
access the Year 2000 Home Page and obtain information on the Company's
millennium services, VISION 2000(SM), and will be automatically linked to the
Company's web site to obtain more detailed information on VISION 2000(SM).
41
<PAGE>
Trade Shows. CSI has co-sponsored Year 2000 conferences and expositions in
concert with the Software Productivity Group in London, Toronto and New York
City. CSI is scheduled to be a co-sponsor at two additional Year 2000
conferences and expositions with the Software Productivity Group during 1997 in
Chicago and San Francisco. These Year 2000 conferences have historically been
sold out with attendees numbering in excess of 500. CSI also participated at
the UNISYS Users Meeting in April, 1997. CSI has found that participating in
Year 2000 trade shows provides a vehicle to reach a large number of potential
clients in a short period of time.
Marketing Communications. The Company has contracts with Michael Baybak and
Company, Inc., a public relations and consulting company to enhance media
recognition of CSI's millennium services, technology and expertise. The Company
believes, the positive name recognition of CSI with Year 2000 compliance will
further enhance its opportunities in the marketplace.
Joint Marketing. The Company will seek joint marketing opportunities with its
alliance partners. The Company believes that the marketing resources of its
alliance partners will add to the exposure and credibility of the Company's
VISION 2000(SM) solution.
SALES
Recognizing that the window for contacting and winning clients for Year 2000
services is small and closing with each passing day, the Company has initiated
a very aggressive and multi-faceted sales campaign. Highlights of the Company's
sales campaign are listed below:
Strategic Alliances. CSI has formed strategic alliances with major prime
contractors who are addressing the Year 2000 problem or have a client base in
the market segment. These companies bring a substantial client base, a national
or international distribution system and provide credibility that CSI could not
match by itself. At the present time, CSI has established alliances with EDS
Federal, Hewlett Packard, Hitachi Data Systems and First Technology Solutions.
Although the Company has not yet received any clients through its strategic
partners, the Company believes that as the Year 2000 approaches its strategic
partners will receive demand from their client base for Year 2000 compliance
support and will call on CSI to provide these services.
Direct Marketing. CSI implemented a mail-out campaign to over 300 financial
institutions that will be followed by telephone contacts to determine interest
and potential buyers of millennium services.
Direct Sales. The Company uses a telemarketing approach that cold calls
select markets, i.e., financial institutions, communications companies, UNISYS
users, PL1 systems users, etc., to introduce CSI's millennium services and
arranges a technical briefing for the potential client. The Company's senior
sales and technical personnel conduct the technical briefing. This approach is
designed to maximize the use of CSI's talented employees and shorten the sales
cycle by responding to all the client's technical issues and concerns at the
technical briefing.
Independent Sales Representatives. The Company has recruited independent
sales representatives to sell CSI's VISION 2000(SM) solution. These sales
representatives operate on a sale-of-opportunity basis, utilizing their
existing industry contacts, and are only compensated on successful sales on a
percentage commission basis. These sales representatives pay their own
expenses. The Company also employs sales representative who earn a salary plus
a percentage commission basis.
CLIENTS
CSI has successfully performed pilots for several large companies. CSI has
entered into a Year 2000 compliance contract with Bessemer Trust, a financial
and investment adviser that supervises over $14 billion in assets for over 800
clients with offices in 10 cities. CSI has also submitted proposals to provide
its millennium and other software re-engineering services to approximately 15
other companies in telecommunications, utilities, health care, retail,
manufacturing and related industries in addition to state and federal
government agencies. All of these proposals are currently pending.
42
<PAGE>
COMPETITION
The market for millennium services is highly competitive and will become
increasingly competitive as the Year 2000 approaches. The Company classifies
its existing competitors addressing the Year 2000 problem into three
categories: (1) Product Vendors; (2) Full Service Providers; and (3)
Consultants.
Product Vendors. Companies that have been providing legacy system support
through software tools have made modifications and enhancements to their
existing tools to support Year 2000 services. The majority of the available
tools utilized by product vendors support legacy code analysis for applications
written in COBOL. The Company believes that product vendors will continue to
proliferate and will offer piece-meal solutions to the Year 2000 problem. Most
product vendors will likely concentrate in the assessment of COBOL based
systems and will likely attempt to form strategic alliances with full service
providers and consultants since the majority of clients will look to outsource
the Year 2000 solution. It is also possible that repair product vendors may
even attempt to become full service providers by acquiring proven program
managers and low cost converters. Product vendors that are currently providing
legacy system support for the Year 2000 problem include: ADPAC Corp., Alydaar
Software Corp., ISOGON, Mainware Inc., Quintic Systems, Inc., SEEC, Inc., Trans
Century Data Systems, and Viasoft, Inc.
Full Service Providers. Major companies providing information technology
professional services to their clients, especially data center related services
(such as programmers and software development), are developing tools to provide
analysis and conversion support to their clients with Year 2000 problems.
Although there are a limited number of full service providers, their Year 2000
services afford them an opportunity to penetrate new accounts and leverage
other products and services. The Company believes that several full service
providers have acquired off-shore support to lower their cost. The Company also
believes that existing clients of full service providers will seek assistance
from the established full service provider relationship to resolve their Year
2000 problems. The Company believes that full service providers will remain
limited in number and some will form strategic alliances with product vendors
if the tools offered by product vendors are perceived to be superior in terms
of quality and cost to those developed in-house by the full service providers.
Examples of full service providers are: Cap Gemini America, Computer Horizons,
EDS, IBM ISSC, IBS Conversions, Inc., and Information Management Resources,
Inc.
Consultants. The Company believes that most companies providing information
technology (IT) consulting to their clients will expand their services to
include Year 2000 support. However, the Company believes that most of the
efforts of IT consultants to date have been focused on the up-front segment of
the solution, i.e., assisting clients in determining the size and scope of
their Year 2000 problem and developing a fixed strategy to resolve the Year
2000 problem in concert with their client's long term IT plans. The Company
seeks to establish relationships with IT consultants and thereby work
cooperatively with consultants to resolve their clients' Year 2000 problems
utilizing the Company's services. The Company believes that consultants will
continue to leverage existing high level client relationships into a Year 2000
business. However, the Company also believes that consultants will typically
seek to form strategic alliances with product vendors. Examples of consultants
are Deloitte Touche and James Martin & Co.
INTELLECTUAL PROPERTY
The Company's intellectual property primarily consists of the methodologies
developed for use in its millennium services and ownership or exclusive rights
to the use of its software tool suite known as the VISION 2000(SM) solution. The
Company does not have any patents and relies upon a combination of trade
secret, copyright and trademark laws and contractual restrictions to establish
and protect its ownership of its proprietary methodologies and exclusive rights
to use its software tool suite. The Company generally enters into non-
disclosure and confidentiality agreements with its employees, independent sales
agents, and clients. Despite these precautions, it may be possible for an
unauthorized third party to replicate the Company's methodologies or to obtain
and use information that the Company regards as proprietary.
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<PAGE>
As the number of competitors providing millennium services similar to those
offered by the Company increases, it is more likely that substantially similar
tools and methodologies will be used in providing such services. Although the
Company's software products and services have never been the subject of an
infringement claim, there can be no assurance that third parties will not
assert infringement claims against the Company in the future, that the
assertion of such claims will not result in litigation, or that the Company
would prevail in such litigation or be able to obtain a license for the use of
any allegedly infringed intellectual property from a third party on
commercially reasonable terms. Furthermore, litigation, regardless of its
outcome, could result in substantial cost to the Company and divert
management's attention from the Company's operations. Although the Company is
not aware of any basis upon which a third party could assert an infringement
claim, any infringement claim or litigation against the Company could therefore
materially adversely affect the Company's business, operating results, and
financial condition. See "Risk Factors--Risk of Third Party Claims of
Infringement."
PERSONNEL
As of June 18, 1997, the Company had 17 full-time employees including 5
persons in Sales, 8 persons in Operations/Engineering and 4 persons in
Management and Administration. The Company also employs temporary employees and
consultants.
PROPERTIES
The Company's corporate headquarters are located at 20251 Century Boulevard
in Germantown, Maryland, outside Washington, D.C. The Company currently
occupies approximately 13,000 square feet through a sublease that expires
September 30, 2000. The Company's annual rent for 1997 is $132,912, and is
subject to annual upward adjustment. The Company also pays its pro rata share
of increases to real estate taxes and operating expenses for the property. The
Company anticipates expanding its current facilities to accommodate the
expected continued growth of the Company. The Company believes that it can
obtain the additional facilities required to accommodate its projected needs
without difficulty and at commercially reasonable prices, although no assurance
can be given that it will be able to do so.
LEGAL PROCEEDINGS
The Company is not involved in any material legal proceedings except possibly
as described below. On April 17, 1997, Alan L. Levine and Canadian American
Petroleum Corporation filed suit in the Third Judicial District Court of Sale
Lake County, Utah against Old ZMAX, f/k/a Mediterranean Oil Corp., f/k/a Oryx
Gold Corp., f/k/a Pandora, Inc. and John Does. The lawsuit seeks unspecified
consequential and punitive damages arising from the alleged delay in the
issuance of shares of Common Stock of Pandora, Inc. The plaintiffs allege that
they currently own approximately 64,000 shares of stock earned as compensation
for services rendered at various times prior to 1992. The lawsuit is currently
in the investigative stage and the time to answer has not matured. Given the
preliminary stage of this proceeding, the Company has not been able to assess
the relative materiality, or lack thereof, of the plaintiff's claims. The
Company intends to vigorously defend itself in this action.
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MANAGEMENT AND EXECUTIVE COMPENSATION
DIRECTORS AND DIRECTOR NOMINEES
Certain information about the Old ZMAX's directors and director nominees is
listed below.
<TABLE>
<CAPTION>
NAME AGE
---- ---
<S> <C>
Michel Berty............................................................. 57
Michael C. Higgins....................................................... 52
G.W. Norman Wareham(1)................................................... 44
Steve L. Komar(1)........................................................ 55
Robert H. Miller......................................................... 44
Ted Fine................................................................. 60
Edward Yourdon (nominee)................................................. 53
</TABLE>
- --------
(1) Member of Compensation Committee
MR. BERTY was appointed a Director of Old ZMAX as of April 1, 1997, and was
elected the Chairman of the Board by the Board of Directors. Prior to joining
the Company, Mr. Berty was a member of senior management of the Cap Gemini
Group, a leading information technology consulting and services company, for
25 years. His last assignments were from 1985 to 1992, as General Secretary of
the Group in Paris, and from 1992 to 1997, as Chairman and CEO of Cap Gemini
America. Mr. Berty earned a PhD in Physics and an MBA from Paris La Sorbonne
University in France. He is a director of Intersolv, Inc., Sapiens
International Corporation Inc., Mastech, Inc. and Level 8 Systems, Inc., all
of which are Nasdaq traded companies, and Computron Software Inc., which is
traded on the OTC. Mr. Berty has significant expertise in the Year 2000
problem.
MR. HIGGINS co-founded CSI in December 1995, and serves as its President and
CEO. After the CSI recapitalization in November 1996, Mr. Higgins became a
director and was elected as the President of Old ZMAX in December 1996. Prior
to founding CSI, from 1993 to 1996, Mr. Higgins was a Vice President of
Integrated Microcomputer Systems Inc., a software reengineering company that
developed the VISION 2000(SM) proprietary tools used by the Company. From 1991
to 1993, Mr. Higgins was Vice President of Anstec Inc., an information
technology technical services company in Fairfax, Virginia. Mr. Higgins served
from 1986 to 1991, as a director of Martin Marietta Corp.'s Information
Services unit that specializes in providing information systems services to
the U.S. federal government. From 1970 to 1986, Mr. Higgins served in various
executive positions at AT&T including Division Sales Manager and Division
Engineering Manager. Mr. Higgins earned an MBA from Xavier University and a
B.S. in Engineering from the United States Military Academy at West Point.
MR. WAREHAM has been the Vice President and Chief Financial Officer of Old
ZMAX and on its Board of Directors since September 1996. Prior to joining Old
ZMAX, from 1994 to April 1995, Mr. Wareham served as the President of Global
Financial Corporation, a Turks and Caicos investment company. Mr. Wareham
currently serves as a director and/or officer of Intercap Resources Management
Corp., an oil and gas exploration and development company traded on the
Vancouver Stock Exchange and Cybernet Internet Services International Inc., a
start up Internet services company. In addition, Mr. Wareham is the President
of Wareham Management Ltd. which provides management consulting and accounting
services to Canadian and American public companies, including the Company. Mr.
Wareham is a certified general accountant and has been engaged in public
practice accounting for over twenty years.
MR. KOMAR was appointed to the Company's Board of Directors in November
1996, and serves as Fiserv, Inc.'s representative on the Board. Mr. Komar is a
Group Executive Vice President of Fiserv, Inc., a Nasdaq traded company and
leading provider of advanced data processing services and related products to
the financial industry. His responsibilities at Fiserv include overseeing
Fiserv's product companies that offer services to treasury and cash management
markets, the mortgage banking industry and the federal government sector. Mr.
45
<PAGE>
Komar was formerly Executive Vice President and Chief Financial Officer of
Citicorp Information Resources, Inc. ("CIR"), a wholly owned subsidiary of
Citicorp providing software and transaction processing services to financial
institutions, that was acquired by Fiserv in 1991. He was with CIR from 1985
through its divestiture date. Prior to that, Mr. Komar was Chief Financial
Officer of Diners Club International, a Citicorp subsidiary. From 1970 through
1980, he was associated with Gulf & Western Industries in several positions,
the two most current being Director of International Special Projects, and
President of Gulf & Western International Holding Company. Mr. Komar is a
graduate of the City University of New York with a B.S. in Accounting and
holds a Masters degree in Finance from Pace University.
MR. MILLER has been a director of the Company since November 1996. Since
1991, Mr. Miller has served as the President and a Director of Job Industries,
a company involved in the commercial application of ice blasting technology.
He is also a director of Ourominas Minerals, Inc., a Brazilian and Venezuelan
gold mining company. From 1993 to 1996, he served as a Director of Eurus
Resources, a mining and mineral exploration company, and from 1990 to 1994, as
a Chairman and a Director of Crystallex International Corporation, a
Venezuelan gold mining company.
MR. FINE was elected to the Board of Directors in May 1997. In 1993, Mr.
Fine co-founded Level 8 Systems, Inc., a middleware software company traded on
Nasdaq and currently serves on its board of directors. He is also a principal
and co-founder of Decision Drivers, Inc., a joint venture formed with The
Gartner Group in 1995 that develops sophisticated decision analysis software.
Mr. Fine consults on computer system strategic planning for a number of large,
public company clients, including the U.S. Postal Service, American Express
and the Norwest Corporation. Prior to 1994, Mr. Fine was employed by Citibank
for 19 years where he was responsible for managing Citibank's worldwide retail
banking systems and developed Citibank's global ATM Network.
MR. YOURDON is a software engineering consultant and has worked in the
computer software industry for 30 years, including positions with General
Electric and DEC. From 1994 to 1997, when the Company was acquired, Mr.
Yourdon was a director of Requisite, Inc., a leading supplier of groupware
tools for requirements management. Since January 1997, Mr. Yourdon has been a
director of Mastech Systems Corp., a leading supplier of software program and
systems development services. From 1991 to 1993, Mr. Yourdon was a member of
the expert advisory panel on I-CASE acquisition for the U.S. Department of
Defense. He is the editor of three software journals --American Programmer,
Corporate Internet Strategies and Application Development Strategies -- that
analyze software technology trends and products in the United States and
several other countries. In 1974, Mr. Yourdon founded and was the CEO of his
own consulting firm, Yourdon, Inc., that provided educational, publishing and
consulting services in state-of-the-art software engineering technology, which
company was sold in 1986. Mr. Yourdon is the author of over 200 technical
articles and 24 computer and programming books. Mr. Yourdon received a B.S. in
Applied Mathematics from MIT and has done graduate work at MIT and the
Polytechnic Institute of New York.
The Company compensates certain of its outside directors at $12,000 per
year. The Company also reimburses all directors their expenses in attending
Board of Directors meetings.
46
<PAGE>
EXECUTIVE OFFICERS, KEY EMPLOYEES AND CONSULTANTS
Certain information about the Old ZMAX's executive officers and key
personnel is listed below.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Michael C. Higgins................. 52 President and Chief Executive Officer
Joseph Yeh......................... 52 Senior Vice President-Technology
G.W. Norman Wareham................ 44 Vice President, Chief Financial Officer
and Secretary
Shafiq Nazerali.................... 36 Consultant
</TABLE>
Biographical information about these individuals who are also directors of
Old ZMAX is listed above. See "Management and Executive Compensation--
Directors and Director Nominees."
MR. YEH is the Senior Vice President-Technology of CSI and, beginning in
September 1996, was a consultant to the Company. For the eight year period
prior to his engagement by the Company, Mr. Yeh was an executive officer of
Integrated Microcomputer Systems, Inc. ("IMS") serving as its President from
1993 to 1996 and as its Senior Vice President from 1989 to 1993. Mr. Yeh also
managed IMS' Taiwan subsidiary, Information Management Services, Inc., in the
design and development of management information systems for both government
and commercial clients of the Republic of China. Mr. Yeh was instrumental in
the development of the Company's VISION 2000SM proprietary tools and
methodology. Mr. Yeh earned both an M.S. and B.S. in Computer Science from the
University of Maryland.
MR. NAZERALI has been a key consultant to the Company since September 1994,
providing advice in connection with the Company's efforts to raise capital for
its operations and with acquisition and strategic growth opportunities. Mr.
Nazerali is also a financial consultant at International Portfolio Management
Inc. and has held that position since January 1992. Since October 1994, Mr.
Nazerali has served as a director of Intercap Resources Management Corp., an
oil and gas exploration and development company traded on the Vancouver Stock
Exchange. For the period from February through December of 1995, Mr. Nazerali
was a director of Multivision Communications Corp., a telecommunications
company traded on the Vancouver Stock Exchange. Previously, from July 1992 to
August 1995, he was the Vice President and/or director of Canbras
Communications Corp., a Brazilian telecommunications company. Mr. Nazerali
also currently sits on the Boards of Directors of TDK Ventures Ltd, a publicly
listed development stage company, and Harambe Mining Co., a publicly listed
African mining company. He is responsible for identifying acquisition targets
and raising venture funds for those entities. Mr. Nazerali is a financial
consultant and also engages in sourcing venture capital funds for private and
public companies focused in the technology and communications industry.
With the exception of Mr. Higgins and Mr. Yeh who worked together at
Integrated Microcomputer Systems, Inc., the Company's senior management
personnel have worked together only a short time. There are no family
relationships between any director, executive officer or person nominated to
become a director.
The Board of Directors elects officers annually or at such other times as
are necessary for the operation of the Company's business and such officers
serve at the discretion of the Board.
47
<PAGE>
The following table sets forth certain information regarding compensation
awarded to, paid to, or earned by, each person who served as Chief Executive
Officer of the Company in 1996 and each of the other executive officers of the
Company whose total annual salary and bonus exceeded $100,000 for the fiscal
year ended December 31, 1996 (these persons are sometimes referred to as the
"Named Executives").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------------------------
RESTRICTED SECURITIES
STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS AWARDS OPTIONS COMPENSATION(1)
- --------------------------- ---- ----------- ------------------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Michael C. Higgins...... 1996 $ 62,000 $ 0 0 0 $ 0
President and Chief
Executive Officer 1995(1) $ 0 $0 0 0 $0
Michael S. Cannon....... 1996 $ 62,000 $ 0 0 0 $ 0
Executive Vice Presi-
dent 1995(2) $ 0 $ 0 0 0 $ 0
Edward Blessing (4)..... 1996 $ 58,034(3) $ 0 0 0 $ 0
President and Chairman
of the Board 1995 $ 0 $ 0 0 3,125(6) $ 0
1994 $ 0 $ 0 0 1,562(7) $ 0
Lloyd Merrifield (5).... 1996 $ 10,000 $ 0 0 0 $ 0
President and Chief Fi-
nancial Officer 1995 $ 0 $ 0 0 1,562(6) $ 0
1994 $ 0 $ 0 0 1,562(7) $ 0
</TABLE>
- --------
(1) CSI was formed in December 1995, and Mr. Higgins received no compensation
from CSI in 1995. Mr. Higgins was employed as President of CSI throughout
1996 and became President of Old ZMAX in December, 1996.
(2) CSI was formed in December 1995, and Mr. Cannon received no compensation
from CSI in 1995. Mr. Cannon was employed as the Senior Vice President-
Sales of CSI throughout 1996. Mr. Cannon resigned from the Company in
April 1997. Pursuant to the terms of his employment agreement with CSI and
his separation agreement with CSI, he is collecting severance from the
Company in the amount of $100,000 per year through November 1999. Mr.
Cannon has agreed to provide consulting services for sales and marketing
events as requested by the Company at no additional fee to the Company.
(3) Inclusive of reimbursement for expenses.
(4) Mr. Blessing served in these positions from June 13, 1995 to September 30,
1996.
(5) Mr. Merrifield served in these positions from September 27, 1994 to June
13, 1995. This amount was paid to Mr. Merrifield in 1996 for services
rendered by him in 1995 and 1994.
(6) These options did not survive the Named Executive's tenure as Chief
Executive Officer of the Company and are therefore cancelled.
(7) These options were voluntarily cancelled by the Named Executives upon
resignation from the Company.
The Company did not grant any stock options to purchase shares of Common
Stock or stock appreciation rights ("SARs") to the Named Executives or others
during fiscal year 1996. The Company has no stock options to purchase shares
of common stock held by the Named Executives on December 31, 1996. The Company
has no outstanding SARs.
EMPLOYMENT AGREEMENTS
The Company maintains written employment agreements with the following key
executive officers of its operating subsidiary:
Michael Higgins
As part of the CSI recapitalization, on November 6, 1996, CSI entered into
an employment agreement with Mr. Higgins to serve as President of CSI. The
agreement was amended effective January 1, 1997 to set forth the
48
<PAGE>
compensation determined by the Company's Compensation Committee. Mr. Higgins'
base salary is $150,000 per year for 1997, $175,000 for 1998 and $200,000 for
1999. The agreement provides for a bonus of up to 100% of base salary upon the
achievement of performance criteria including gross revenue and earnings
targets, which criteria will be adjusted each year by the Compensation
Committee. If the performance goals are not met or if Mr. Higgins is no longer
employed by the Company (unless for cause), the bonus may be paid at the
discretion of the Compensation Committee. The bonus is payable 25% in cash and
75% in Common Stock based on the fair market value of the Common Stock at the
end of the fiscal year. The agreement is for a three-year term commencing on
November 6, 1996, and is terminable by the executive upon 60 days notice to
the Company and by the Company on notice to the executive. The agreement
contains non-competition, non-solicitation and non-disclosure provisions
restricting the executive from employment with any competing business,
soliciting or diverting Company employees and customers to a competing
business or disclosing the Company's proprietary information to third parties
during the term of the agreement and for up to two years thereafter. Under
certain circumstances, the agreement requires the Company to make severance
payments to the executive for the remaining term of the agreement.
Mr. Yeh
On June 18, 1997 the Company entered into an employment agreement with Mr.
Yeh as CSI's Senior Vice President--Technology. This agreement is
retroactively effective to January 1, 1997 and replaces Mr. Yeh's consulting
agreement with the Company. The agreement is for a three year term commencing
January 1, 1997, and is terminable by the Company only for cause (as defined).
Mr. Yeh's base salary for 1997 is $125,000 and will increase by 10% in each
subsequent year. The agreement provides for a bonus of up to 100% of base
salary upon the achievement of performance criteria including gross revenue
and earnings targets, which criteria will be adjusted each year by the
Compensation Committee. If the performance goals are not met or if Mr. Yeh is
no longer employed by the Company (unless for cause), the bonus may be paid at
the discretion of the Compensation Committee. The bonus is payable 50% in cash
and 50% in Common Stock based on the fair market value of the Common Stock at
the end of the fiscal year. The agreement contains non-competition, non-
solicitation and non-disclosure provisions restricting the executive from
employment with any competing business, soliciting or diverting Company
employees and customers to a competing business or disclosing the Company's
proprietary information to third parties during the term of the agreement and
for up to two years thereafter. Under certain limited circumstances, the
agreement requires the Company to make severance payments to the executive for
a nine month period. If the agreement is terminated by the Company without
cause (as defined) the Company must continue to pay the executive's base
salary for the remainder of the term of the agreement.
See "Compensation Committee Report on Executive Compensation."
KEY CONSULTANT AGREEMENTS
The Company maintains written consulting agreements with the following key
consultants.
Michel Berty
On April 1, 1997, the Company entered into a consulting agreement with MBY,
Inc., a company wholly owned by Michel Berty, and Michel Berty for management
consulting services. This agreement is for a term of three years, with
successive automatic renewals for additional one-year periods. The monthly
consulting fee payable to MBY, Inc. is $20,000 plus reimbursement of out-of-
pocket expenses. If the consulting agreement is terminated by the Company
without cause prior to its expiration, the Company is obligated to continue to
pay the monthly $20,000 fee for the remaining term of the Agreement or one
year after such termination, whichever occurs first.
Shafiq Nazerali
On May 30, 1997, the Company entered into a consulting agreement with Mr.
Nazerali for services associated with raising capital, business development
and strategic opportunities. This agreement documents a long-standing
consulting arrangement with Mr. Nazerali and is for a term of one year, with
successive automatic renewals for additional one-year periods. The monthly
consulting fee payable to Mr. Nazerali is $10,000 plus reimbursement of out-
of-pocket expenses.
49
<PAGE>
G.W. Norman Wareham
On May 30, 1997, the Company entered into a consulting agreement with
Wareham Management Ltd. for accounting and financial services. This agreement
documents the oral consulting arrangements with Mr. Wareham and is for a term
of one year, with successive automatic renewals for additional one-year
periods. The monthly consulting fee payable to Wareham Management Ltd. is
$3,500 plus Canadian goods and services tax and reimbursement of out-of-pocket
expenses.
All of the Company's consulting agreements with its consultants are
terminable by the Company on notice and contain non-competition, non-
solicitation and non-disclosure provisions restricting the consultant from
engaging in any similar services for any competing business, soliciting or
diverting Company employees and clients to any competing business, or
disclosing the Company's intellectual property to third parties during the
term of the agreement and for two years thereafter.
BOARD OF DIRECTORS AND COMMITTEE MEETINGS
The Board of Directors of the Company held eleven meetings or written
consent actions during 1996. In December 1996, the Board of Directors
established a Compensation Committee. The Compensation Committee reviews and
makes recommendations to the Board of Directors regarding the compensation and
benefits of all the executive officers and consultants of the Company,
administers the Company's compensation and benefit plans, and reviews general
policies relating to compensation and benefits. The members of the
Compensation Committee are Messrs. Komar and Wareham. Mr. Nazerali consults
with the Compensation Committee upon request. The Compensation Committee did
not hold any meetings during 1996. The Company does not have any other Board
Committees. Each director attended at least 75% of the meetings of the Board
of Directors and all written consent actions were signed by all directors
holding office at the time the action was taken.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee consists entirely of nonemployee directors and
determines the compensation paid to the Chief Executive Officer and the other
executive officers and consultants of the Company. The Compensation Committee
believes that for the Company to be successful long-term and for it to
increase stockholder value it must be able to hire, retain, adequately
compensate and financially motivate talented and ambitious executives. The
Compensation Committee attempts to reward executives for both individual
achievement and overall Company success.
Executive compensation is made up of three components:
Base Salary. An executive's base salary is initially determined by
considering the executive's level of responsibility, prior experience and
compensation history. Published salaries of executives in similar positions
at other companies of comparable size (sales and/or number of employees) is
also considered in establishing base salary.
Stock Options. The Company adopted an incentive stock option plan to
provide stock option awards to certain executives. See "Proposal to Approve
ZMAX Corporation 1997 Stock Incentive Plan." The Compensation Committee
believes that the granting of stock options is directly linked to increased
executive commitment and motivation and to the long-term success of the
Company. The Compensation Committee awards stock options to certain
executives. The Compensation Committee intends to use both subjective
appraisals of the executive's performance and the Company's performance and
financial success during the previous year to determine option grants.
Bonus. The Company has also implemented an executive bonus program for
certain of its executives. Such bonuses are based, in part, on the
Company's financial performance during the previous fiscal year including
achievement of gross revenue and net income targets. In addition, objective
individual measures of performance compared to the individual's business
unit profit performance may be considered. A subjective rating of the
executive's personal performance may also be considered. Bonuses may be
paid in cash or Common Stock or a combination of cash and Common Stock.
Bonuses are typically linked to a percentage of base salary.
50
<PAGE>
The Compensation Committee recommended to the Board of Directors and the
Board of Directors approved a compensation package for the Company's Chief
Executive Officer, Mr. Higgins, that includes a $150,000 base salary with
annual increases plus a bonus of up to 100% of the base salary and for its
Senior Vice President--Technology, Mr. Yeh, that includes a $125,000 base
salary with annual increases and a bonus of up to 100% of the base salary.
Receipt of the bonus is subject to the Company's achievement of certain
performance criteria, including gross revenue and net income targets. If the
bonus targets are achieved, the bonus for Mr. Higgins would be paid 25% in
cash and 75% in Common Stock and the bonus for Mr. Yeh would be paid 50% in
cash and 50% in Common Stock. In each case, the number of shares of bonus
stock will be equal to the dollar amount of the bonus payable in stock divided
by the fair market value (as defined) of the Common Stock at the end of the
fiscal year. If the performance criteria are not achieved or the executive is
no longer employed by the Company (other than for cause termination), a bonus
may be awarded in the discretion of the Compensation Committee.
In determining the 1997 compensation packages for these executive officers,
the Compensation Committee considered that Mr. Higgins was a founder of the
Company, the experience and compensation history of each individual and
compensation packages awarded to similar executives of other similarly
situated start-up companies, to the extent such information could be learned.
The Compensation Committee also relied on competitive industry statistics and
other industry comparison data. The Compensation Committee ensured that the
incentive bonus compensation is only paid if the performance targets are met
and the Company is in a sound financial position.
Exceptions to the general principles stated above are made when the
Compensation Committee deems them appropriate to stockholder interest. The
Compensation Committee regularly considers other forms of compensation and
modifications of its present policies, and will make changes as it deems
appropriate The competitive opportunities to which the Company's executives
are exposed frequently come from private companies or divisions of large
companies, for which published compensation data is often unavailable and,
therefore, the Compensation Committee's information about such opportunities
is often anecdotal.
Section 162(m) of the Internal Revenue Code of 1986, as amended, establishes
a limit on the deductibility of annual compensation for certain executive
officers that exceeds $1,000,000 per year unless certain requirements are met.
The Company does not anticipate that any employee will exceed such $1,000,000
cap in the near future but will consider whether any necessary adjustments are
appropriate if it becomes likely that any executive officer's compensation may
exceed the $1,000,000 limit.
Compensation Committee
Steve L. Komar
G.W. Norman Wareham
51
<PAGE>
STOCKHOLDER RETURN PERFORMANCE GRAPH
The following graphs shows a comparison of cumulative total returns for Old
ZMAX (and its predecessors) Common Stock, the Nasdaq Stock Market (U.S.) Index
and the Nasdaq Computer & Data Processing Industry Index since December 31,
1992. The comparisons in this table are required by the Commission and,
therefore, are not intended to forecast or be indicative of possible future
performance of the Common Stock.
COMPARISON OF 48 MONTH CUMULATIVE TOTAL RETURN*
AMONG ZMAX CORPORATION, THE NASDAQ STOCK MARKET (U.S.) INDEX
AND THE NASDAQ COMPUTER & DATA PROCESSING INDEX
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
NASDAQ COMPUTER &
ZMAX CORPORATION NASDAQ STOCK MARKET (U.S.) DATA PROCESSING
---------------- -------------------------- -----------------
<S> <C> <C> <C>
12/92 $100 $100 $100
12/93 $178 $115 $106
12/94 $178 $112 $129
12/95 $11 $159 $196
12/96 $73 $195 $242
</TABLE>
* $100 INVESTED ON 12/31/92 IN STOCK OR INDEX, INCLUDING REINVESTMENT OF
DIVIDENDS. FISCAL YEAR ENDING DECEMBER 31. THERE WAS NO ESTABLISHED U.S.
TRADING MARKET FOR OLD ZMAX OR ITS PREDECESSORS AS OF DECEMBER 31, 1991.
1997 DIRECTORS FORMULA STOCK OPTION PLAN
The Company maintains the ZMAX Corporation 1997 Directors Formula Stock
Option Plan (the "Director Plan"). The Board of Directors has reserved 120,000
shares of Common Stock for issuance pursuant to awards may be made under the
Director Plan subject to adjustment as provided therein. The number of shares
of Common Stock associated with any forfeited option are added back to the
number of shares that can be issued under the Director Plan.
The awards under the Director Plan are determined by the express terms of
the Director Plan. The Director Plan will be administered by a committee (the
"Committee"), the members of which are appointed by the Board of Directors.
The Committee will consist of at least one or more members of the Board of
Directors who will not receive a grant of an option under the Director Plan
and who are not currently eligible to receive a grant of an option under the
Director Plan. The Committee members are currently Messrs. Berty and Higgins.
The
52
<PAGE>
Committee will have the authority in its sole discretion to interpret the
Director Plan and to make all other determinations and to take all other
actions it deems necessary or advisable for the implementation and
administration of the Director Plan.
Other than Mr. Komar and Mr. Wareham, only nonemployee directors of the
Company who do not perform services for the Company are eligible to
participate in the Director Plan. The Director Plan provides for option grants
upon a nonemployee director's initial appointment after May 20, 1997 to the
Board of Directors to purchase 12,000 shares of Common Stock at a price per
share exercise price equal to the then fair market value of a share of Common
Stock. The nonemployee director will vest immediately in 8,000 shares of
Common Stock and will vest in an additional 2,000 shares after the completion
of the first year of continued service and an additional 2,000 shares after
the completion of the second year of continued service. Each option granted
pursuant to the Director Plan will be evidenced by an agreement and will be
subject to additional terms as set forth in the agreement.
Options become exercisable when vested and expire ten years after the date
of grant, subject to such shorter period provided in the agreement.
The Director Plan was effective on May 20, 1997, and will continue to be
effective until ten years after the effective date of the Director Plan,
unless sooner terminated by the Board of Directors.
The number of shares of Common Stock reserved for issuance upon exercise of
options granted under the Director Plan, the number of shares of Common Stock
subject to outstanding options and the exercise price of each option are
subject to adjustment in the event of any recapitalization of the Company or
similar event. The number of shares of stock subject to options granted in
connection with initial appointments or as annual service awards are also
subject to adjustment in such events. In the event of certain corporate
reorganizations and similar events, the options may be adjusted or, with
regard to vested options, cashed out depending upon the nature of the event.
As of the date of this Proxy Statement/Prospectus, 36,000 options have been
granted under the Director Plan and an additional 12,000 options will be
granted to a director nominee upon his taking office with the Company
following the completion of the transactions contemplated by this Proxy
Statement/Prospectus.
A participant will not recognize income upon the grant of an option or at
any time prior to the exercise of the option or a portion thereof. At the time
a participant exercises a nonqualified option or portion thereof, he or she
will recognize compensation taxable as ordinary income in an amount equal to
the excess of the fair market value of the Common Stock on the date the option
is exercised over the price paid for the Common Stock, and the Company will
then be entitled to a corresponding deduction.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Pursuant to the Delaware Law, New ZMAX has adopted provisions in its
Certificate of Incorporation that eliminate the personal liability of its
directors to the Company and its stockholders for monetary damages for breach
of the directors' fiduciary duties in certain circumstances and authorize the
Company to indemnify its directors and other agents, by bylaw, agreements or
otherwise, to the full extent permitted by law. The Company's bylaws require
the Company to indemnify its directors to the full extent permitted by law,
including those circumstances in which indemnification would otherwise be
discretionary.
53
<PAGE>
PROPOSAL TO ELECT DIRECTORS
The Bylaws of the Company currently provide that the Board of Directors will
determine the number of directors to serve on the Board. The Company's Board
of Directors currently consists of seven members. Each director holds office
until the next Annual Meeting of Stockholders and until his or her successor
is elected and qualified or until his or her earlier resignation or removal.
The Board of Directors has proposed six nominees for directors of Old ZMAX for
vote at the Old ZMAX 1997 Annual Meeting of Stockholders. Other than Edward
Yourdon, each of the six nominees is presently serving as a director of the
Company. If no direction to the contrary is given, all proxies received by the
Board of Directors will be voted "FOR" the election of the six nominees. If
any nominee is unable or declines to serve, the proxy solicited herewith may
be voted for the election of another person in his or her stead at the
discretion of the Board of Directors. The Board of Directors knows of no
reason to anticipate that this will occur. The nominees for directors are:
Michel Berty, Michael C. Higgins, Steve L. Komar, G.W. Norman Wareham, Ted
Fine and Edward Yourdon. Biographical information for all of the nominees is
set forth above in "Directors and Director Nominees."
The Board of Directors of New ZMAX will be classified and the directors will
serve staggered terms as described under "Comparison of Stockholder Rights."
Assuming the nominees set forth above are elected to the Board of Old ZMAX and
the Merger is approved, such persons will become directors of New ZMAX as of
the Effective Time and will be classified as follows:
CLASS I--TERM EXPIRES AT THE 1998 ANNUAL MEETING
Michael C. Higgins
G.W. Norman Wareham
CLASS II--TERM EXPIRES AT THE 1999 ANNUAL MEETING
Michel Berty
Steve L. Komar
CLASS III--TERM EXPIRES AT THE 2000 ANNUAL MEETING
Ted Fine
Edward Yourdon
PROPOSAL TO APPROVE ZMAX CORPORATION 1997 STOCK INCENTIVE PLAN
The Company maintains the ZMAX Corporation 1997 Stock Incentive Plan (the
"Incentive Plan"). The Incentive Plan provides the Company with increased
flexibility to grant equity-based compensation to key employees, officers,
directors and consultants of the Company or an affiliate. The Board of
Directors has reserved 1,700,000 shares of common stock (the "Common Stock")
for issuance pursuant to awards that may be made under the Incentive Plan,
subject to adjustment as provided therein. The number of shares of Common
Stock associated with any forfeited Stock Incentive are added back to the
number of shares that can be issued under the Incentive Plan. The closing bid
price per share of Common Stock reported on the OTC Bulletin Board was $14.25
as of June 18, 1997.
The Incentive Plan was adopted by the Board of Directors on May 20, 1997.
The Incentive Plan is subject to approval of the stockholders within 12 months
after adoption of the Incentive Plan. If such approval is not obtained, any
Stock Incentives granted under the Incentive Plan will be void. The Incentive
Plan is being submitted for approval to the stockholders of Old ZMAX at the
Meeting. See "The Meeting."
Awards under the Incentive Plan will be determined by a committee (the
"Committee"), the members of which are selected by the Board of Directors. The
current members of the Committee are Messrs. Wareham and Komar. The Incentive
Plan permits the Committee to make awards of a variety of equity-based
incentives, including stock awards, options to purchase shares of Common
Stock, stock appreciation rights, phantom shares, performance unit
appreciation rights, and dividend equivalent rights (collectively, "Stock
Incentives").
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<PAGE>
The number of shares of Common Stock for which a Stock Incentive is granted
and to whom any Stock Incentive is granted shall be determined by the
Committee, subject to the provisions of the Incentive Plan. Stock Incentives
issuable may be made exercisable or settled at such prices and may be made
forfeitable or terminable under such terms as are established by the
Committee, to the extent not otherwise inconsistent with the terms of the
Incentive Plan. Each Stock Incentive will be evidenced by a Stock Incentive
Agreement or made subject to the terms of a Stock Incentive Program, each
containing terms and restrictions as the Committee may deem appropriate. No
participant, however, may be granted during any one year period rights to
shares of Common Stock under options and stock appreciation rights which, in
the aggregate, exceed 1,700,000 shares of Common Stock.
The Incentive Plan allows for the grant of incentive stock options and non-
qualified stock options. The Committee will determine whether an option is an
incentive stock option or a non-qualified stock option at the time the option
is granted. The exercise price of an option is established by the Committee.
The exercise price of an incentive stock option may not be less than the fair
market value of the Common Stock on the date of the grant (or less than 110%
of the fair market value if the participant controls more than 10% of the
voting power of the Company or a subsidiary). Non-qualified stock options may
be made exercisable at a price equal to, less than or more than the fair
market value of the Common Stock on the date that the option is awarded. The
Committee may permit an option exercise price to be paid in cash or by the
delivery of previously-owned shares of Common Stock, or to be satisfied
through a cashless exercise executed through a broker or by having a number of
shares of Common Stock otherwise issuable at the time of exercise withheld.
The term of an option will be specified in the applicable Stock Incentive
Agreement. The term of an incentive stock option may not exceed ten years from
the date of grant; however, any incentive stock option granted to a
participant who controls more than 10% of the voting power of the Company or a
subsidiary will not be exercisable after the expiration of five years after
the date the option is granted. Subject to any further limitations in a Stock
Incentive Agreement, in the event of a participant's termination of
employment, an incentive stock option will become unexercisable no later than
three months after the date of such termination of employment; provided,
however, that if such termination of employment is due to death or disability,
one year will be substituted for the three-month period.
Stock appreciation rights may be granted separately or in connection with
another Stock Incentive, and the Committee may provide that they are
exercisable at the discretion of the holder or that they will be paid at a
time or times certain or upon the occurrence or non-occurrence of certain
events. Stock appreciation rights may be settled in shares of Common Stock or
in cash, according to terms established by the Committee with respect to any
particular award.
The Committee may grant shares of Common Stock to a participant as stock
awards, subject to such restrictions and conditions, if any, as the Committee
may determine. Dividend equivalent rights, performance units and phantom
shares may be granted in such numbers or units and may be subject to such
conditions or restrictions as the Committee may determine and will be payable
in cash or shares of Common Stock, as the Committee may determine. The
Committee may make cash awards designed to cover tax obligations of employees
that result from the receipt or exercise of a Stock Incentive.
Stock Incentives generally are not transferable or assignable during a
holder's lifetime. However, Stock Incentives may include exercise, conversion
or settlement rights to a holder's estate or personal representative in the
event of the holder's death or disability. At the Committee's discretion,
Stock Incentives that are subject to termination upon termination of
employment may be cancelled, accelerated, paid or continued, subject to the
terms of the applicable Stock Incentive agreement and to the provisions of the
Incentive Plan.
The number of shares of Common Stock reserved for issuance in connection
with the grant or settlement of Stock Incentives or to which a Stock Incentive
is subject, as the case may be, and the exercise price of each option are
subject to adjustment in the event of any recapitalization of the Company. In
the event of certain corporate reorganizations, Stock Incentives may be
substituted, cancelled, accelerated, cashed-out or otherwise
55
<PAGE>
adjusted by the Committee, provided such adjustment is not inconsistent with
the terms of the Incentive Plan or any agreement reflecting the terms of a
Stock Incentive.
Although the Incentive Plan may be amended by the Board of Directors without
stockholder approval, the Board of Directors also may condition any such
amendment upon stockholder approval if stockholder approval is deemed necessary
or appropriate in consideration of tax, securities or other laws. No such
action by the Board of Directors may adversely affect the rights of a holder of
a Stock Incentive without the holder's consent.
A participant will not recognize income upon the grant of an option or at any
time prior to the exercise of the option or a portion thereof. At the time a
participant exercises a nonqualified option or portion thereof, he or she will
recognize compensation taxable as ordinary income in an amount equal to the
excess of the fair market value of the Common Stock on the date the option is
exercised over the price paid for the Common Stock, and the Company will then
be entitled to a corresponding deduction.
A participant who exercises an incentive stock option will not be taxed at
the time he or she exercises his or her option or a portion thereof. Instead,
he or she will be taxed at the time he or she sells the Common Stock purchased
pursuant to the option. A participant will be taxed on the difference between
the price he or she paid for the stock and the amount for which he or she sells
the stock. If a participant does not sell the stock prior to two years from the
date of grant of the option and one year from the date the stock is issued to
him or her, the gain will be capital gain and the Company will not get a
corresponding deduction. If a participant sells the stock at a gain prior to
that time, the difference between the amount the participant paid for the stock
and the lesser of the fair market value on the date of exercise or the amount
for which the stock is sold will be taxed as ordinary income and the Company
will be entitled to a corresponding deduction. If the stock is sold for an
amount in excess of the fair market value on the date of exercise, the excess
amount is taxed as capital gain. If a participant sells the stock for less than
the amount he or she paid for the stock prior to the one or two year periods
indicated, no amount will be taxed as ordinary income and the loss will be
taxed as a capital loss. Exercise of an incentive stock option may subject a
participant to, or increase a participant's liability for, the alternative
minimum tax.
A participant generally will not recognize income upon the grant of a stock
appreciation right, dividend equivalent right, performance unit appreciation
right or phantom share (an "Equity Incentive"). At the time a participant
receives payment under any Equity Incentive, he or she generally will recognize
compensation taxable as ordinary income in an amount equal to the cash or the
fair market value of the Common Stock received, and the Company will then be
entitled to a corresponding deduction.
A participant will not be taxed upon the grant of a stock award if such award
is not transferrable by the participant or is subject to a "substantial risk of
forfeiture," as defined in the Code. However, when the shares of Common Stock
that are subject to the stock award become transferrable by the participant and
are no longer subject to a substantial risk of forfeiture, a participant will
recognize compensation taxable as ordinary income in an amount equal to the
fair market value of the stock subject to the stock award, less any amount paid
for such stock, and the Company will then be entitled to a corresponding
deduction. However, if a participant so elects at the time of receipt of a
stock award that is subject to a substantial risk of forfeiture, he or she may
include the fair market value of the stock subject to the stock award, less any
amount paid for such stock, in income at the time of grant and the Company also
will be entitled to a corresponding deduction at that time.
As of June 18, 1997, the Company has issued options to purchase 1,200,000
shares of Common Stock under the Incentive Plan to three individuals including
Messrs. Berty, Higgins and Yeh. On April 17, 1997, Messrs. Berty and Higgins
each received options to purchase 450,000 shares at an exercise price of $14.31
per share. So long as the executive is still employed by the Company, options
for 150,000 shares vest annually if the Company achieves targeted gross
revenues of $9,000,000. Vesting is accelerated to up to 225,000 shares annually
for performance above the target level and is reduced for performance below the
target levels. No vesting will occur if gross revenues are less than $7,000,000
in any fiscal year. On April 17, 1997, Mr. Yeh received options to purchase
300,000 shares at an exercise price of $14.31 per share. Options representing
100,000 shares vested
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<PAGE>
immediately upon grant with an additional 100,000 shares vesting at the end of
each of fiscal years 1998 and 1999 so long as Mr. Yeh is still employed by the
Company. With respect to all of these options, if the executive dies or is no
longer employed by the Company at the end of any fiscal year, the Compensation
Committee may accelerate the vesting of these options in its discretion,
assuming, in the case of options tied to performance goals, that the
performance goals are met. The term of these options is ten years from the
date of grant, subject to prior forfeiture in certain events pursuant to the
Incentive Plan.
The Old ZMAX Board recommends that Old ZMAX stockholders vote "FOR" approval
and adoption of the Incentive Plan.
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PRINCIPAL SHAREHOLDERS
The following table sets forth certain historical and pro forma information
as of July , 1997 with respect to the shares of Common Stock owned (i) by
each of the Company's directors, director nominees and executive officers,
(ii) by all directors, director nominees and officers as a group, and (iii) by
each person known to the Company to own beneficially more than 5% of the
outstanding shares of Old ZMAX Common Stock. The beneficial ownership
reporting requirements of Section 13(d) of the Exchange Act are not yet
applicable to the Company's stockholders because the Old ZMAX Common Stock is
not yet a registered class of equity securities under the Exchange Act. As a
result, there may be other beneficial owners of 5% or more of the outstanding
Old ZMAX Common Stock who hold such shares through nominees and are unknown to
the Company. As of July , 1997, there were 9,450,514 outstanding shares of
Old ZMAX Common Stock, which is the Company's only class of voting shares, and
24,000 option shares that are exercisable within 60 days. In addition, one of
the Company's director nominees will receive options for 12,000 shares upon
his election to the Board of Directors of which options for 8,000 shares will
be immediately exercisable. See "Description of Securities" and "Shares
Eligible for Future Sale."
<TABLE>
<CAPTION>
OLD ZMAX NEW ZMAX
ACTUAL PRO FORMA(1)
-------------------------- --------------------------
DIRECTORS AND NUMBER OF PERCENTAGE OF NUMBER OF PERCENTAGE OF
EXECUTIVE OFFICERS SHARES OUTSTANDING SHARES OUTSTANDING
- ------------------ --------- ------------- --------- -------------
<S> <C> <C> <C> <C>
Michael C. Higgins....... 1,600,000(2) 16.9% 1,600,000(2) 13.5%
Steve L. Komar........... 274,442(3) 2.9% 274,442(3) 2.3%
Joseph Yeh............... 100,000(4) 1% 100,000(4) *
G.W. Norman Wareham...... 8,000(5) * 8,000(5) *
Ted Fine................. 8,000(5) * 8,000(5) *
Edward Yourdon (director
nominee)................ 0 * 8,000(6) *
Robert Miller............ 1,500 * 1,500 *
All current directors,
director nominees and
officers as a group
(seven persons)......... 1,991,942 21.1% 1,999,942 16.8%
5% OR MORE STOCKHOLDERS
- -----------------------
Michael S. Cannon........ 1,600,000(2) 16.9% 1,600,000(2) 13.5%
2756 North Green Valley
Parkway
Suite 280
Henderson, Nevada 89014
Bank Sarasin & Cie....... 723,550(7) 7.7% 923,550(7) 7.8%
11 Lowenstrasse
8001 Zurich
Switzerland
Anker Bank............... 301,225(8) 3.2% 601,225(8) 5.1%
Talstrasse 82
P.O. Box 4923
8022 Zurich
Switzerland
First Capital Invest 480,000 5.1% 480,000(9) 4%
Corp....................
Muehlebachstrasse 54
First Floor
8008 Zurich
Switzerland
</TABLE>
- --------
(1) Based on 11,870,514, shares outstanding, assuming (i) that the Company's
Debentures are fully exchanged in the Exchange Offer for 1,210,000 shares
of Common Stock and Warrants to purchase an equal number of shares and
(ii) the full exercise of the Warrants into 1,210,000 shares of Common
Stock.
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(2) Messrs. Higgins and Cannon were each issued 1,600,000 shares in the
recapitalization of CSI including 1,400,000 shares each that were placed
in escrow subject to release based on future cash flows generated by CSI.
These shares are also pledged to the Company to secure the indemnification
obligations of Messrs. Higgins and Cannon in connection with the CSI
transaction. As of July , 1997, all 2,800,000 of the shares remain in
escrow. See "Management's Discussion and Analysis of Financial Conditions
and Results of Operations--CSI Recapitalization."
(3) 266,442 of these shares are held in the name of Fiserv, Inc. Mr. Komar is
an Executive Vice President of Fiserv, Inc. Mr. Komar disclaims beneficial
ownership of these shares. The remaining 8,000 shares are subject to
presently exercisable stock options granted to Mr. Komar.
(4) Reflects shares subject to presently exercisable stock options.
(5) Reflects shares subject to presently exercisable stock options.
(6) Reflects shares subject to exercisable stock options that will be granted
to Mr. Yourdon upon his election to the Board of Directors.
(7) Includes 523,550 shares of Common Stock and 200,000 shares of Common Stock
issuable upon conversion of Debentures. Pro forma ownership includes an
additional 200,000 shares of Common Stock to be issued upon exercise of
Warrants issued in connection with the Exchange Offer. Bank Sarasin & Cie
has advised the Company that such shares are held as nominee for various
clients of Bank Sarasin & Cie, none of whom beneficially own more than
100,000 shares of Old ZMAX Common Stock and none of whom are acting in
concert. Bank Sarasin & Cie has advised the Company that its clients have
voting power and investment power with respect to these shares and that
Bank Sarasin & Cie disclaims beneficial ownership of these shares.
(8) Includes 1,225 shares of Common Stock and 300,000 shares of Common Stock
issuable upon conversion of Debentures. Pro forma ownership includes an
additional 600,000 shares of Common Stock to be issued upon exercise of
Warrants issued in connection with the Exchange Offer. Anker Bank has
advised the Company that such shares are held as nominee for various
clients of Anker Bank, none of whom beneficially own more than 100,000
shares of Common Stock and none of whom are acting in concert. Anker Bank
has advised the Company that its clients have voting power and investment
power with respect to these shares and that Anker Bank disclaims
beneficial ownership of these shares.
* Less than 1%
59
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Mr. Berty and Mr. Berty's wholly owned company MBY, Inc., are consultants to
the Company providing management advice. See "Management and Executive
Compensation--Key Consulting Agreements."
Mr. Nazerali is a consultant to the Company providing advice in connection
with the Company's efforts to raise capital for its operations and on
acquisition opportunities. Mr. Nazerali received $120,000 consulting fees from
the Company for services rendered in 1996 and $155,635 in reimbursement for
his out-of-pocket expenses. See "Management and Executive Compensation--Key
Consulting Agreements." In addition, Mr. Nazerali was instrumental in the CSI
recapitalization and the financing for the working capital needs of the
Company following that transaction, including the offering of the Debentures
completed in December 1996. See "Description of Securities--Debentures." For
his services to the Company in the CSI recapitalization and Debenture
financing, he was awarded 320,000 shares of Common Stock of the Company. These
shares were issued in the name of Mr. Nazerali's designee, Valorinvest Ltd.,
an Irish company owned by Mr. Nazerali's brother. Valorinvest Ltd. received
approximately $563,000 from Old ZMAX in 1996 in connection with the
recapitalization of CSI as satisfaction for amounts owed by Old ZMAX as of
December 31, 1995.
The Company has engaged Wareham Management Ltd., a company owned by Mr.
Wareham, the Vice President and Chief Financial Officer of the Company, to
provide accounting, bookkeeping and related services under a consulting
agreement. In 1996, Wareham Management Ltd. received approximately $12,235
from the Company for services rendered and $3,016 in reimbursement for his
out-of-pocket expenses. See "Management and Executive Compensation--Key
Consulting Agreements."
Mr. Heideman, a director of the Company from October 1996 through June 18,
1997, was also a consultant to the Company pursuant to a consulting
arrangement. Mr. Heideman received $28,000 in compensation from the Company
for services rendered in 1996 and $4,800 in reimbursement for his out-of-
pocket expenses. This consulting arrangement was terminated by the Company in
April 1997. In addition, Mr. Heideman, through his company, NewDominion
Capital Group Inc., provided consulting services in connection with the CSI
transaction and received 20,000 shares of Common Stock of the Company as
consideration for such services. These shares were issued in the name of
NewDominion Capital Group Inc. in April 1997.
As part of the recapitalization of CSI, the Company acquired the interest of
Fiserv, Inc. in the Fiserv Century Services Joint Venture in exchange for,
among other consideration, Old ZMAX's promissory note for $385,000. In May
1997, this promissory note was converted into 32,077 shares of Old ZMAX Common
Stock issued to Fiserv, Inc. Mr. Komar is a Group Executive Vice President of
Fiserv, Inc. and a director of the Company.
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<PAGE>
DESCRIPTION OF THE SECURITIES
The authorized capital stock of the Old ZMAX consists of 95,000,000 shares
of Old ZMAX Common Stock and 10,000,000 shares of preferred stock, of which
5,000,000 shares have been designated as Series A Preferred Shares. The
Articles of Incorporation authorize the Company's Board of Directors to direct
the issuance of shares of preferred stock in one or more series from time to
time and to fix the designations, powers, preferences, rights, qualifications,
limitations and restrictions of each series, including without limitation
dividend rates, whether dividends will be cumulative, the relative rights of
priority for payment of dividends, voting rights, terms and conditions of
conversion, terms and conditions of redemption, sinking fund provisions, and
rights upon liquidation.
Upon completion of the Merger, the authorized capital stock of New ZMAX will
consist of 50,000,000 shares of Common Stock and 10,000,000 shares of
preferred stock. The New ZMAX Certificate of Incorporation authorizes the
Company's Board of Directors to direct the issuance of shares of preferred
stock in one or more series from time to time and to fix the designations,
powers, preferences, rights, qualifications, limitations and restrictions of
each series, including without limitation dividend rates, whether dividends
will be cumulative, the relative rights of priority for payment of dividends,
voting rights, terms and conditions of conversion, terms and conditions of
redemption, sinking fund provisions, and rights upon liquidation.
COMMON STOCK
As of July , 1997, there were 9,450,514 shares of Old ZMAX Common Stock
issued and outstanding and 100 shares of New ZMAX Common Stock issued and
outstanding. The holders of Old ZMAX Common Stock and New ZMAX Common Stock
are entitled to one non-cumulative vote for each share held of record on all
matters submitted to a vote of shareholders. Subject to preferences that may
be applicable to outstanding shares of Preferred Stock, if any, the holders of
Old ZMAX Common Stock and New ZMAX Common Stock are entitled to receive
ratably such dividends as may be declared by the Company's Board of Directors
out of funds legally available therefor and are entitled to share ratably in
all of the assets of the Company available for distribution to holders of Old
ZMAX Common Stock and New ZMAX Common Stock upon liquidation, dissolution, or
winding up of the affairs of the Company. Holders of New ZMAX Common Stock
have no preemptive, subscription or conversion rights and there are no
redemption or sinking fund provisions or rights applicable thereto. The shares
of New ZMAX Common Stock issued in the Merger will be fully paid and
nonassessable.
COMMON STOCK SUBJECT TO RESERVATION
The Company has reserved 1,820,000 shares of Common Stock for issuance under
its Incentive Plan and Director Plan, including for issuance to executives
under its bonus program. See "Shares Eligible for Future Sale."
CANCELLATION OF CERTAIN SHARES
In September 1995, the Company entered into a stock cancellation agreement
with a stockholder in which it was agreed that the shares of Common Stock held
by the stockholder would be cancelled in exchange for the transfer to the
stockholder of certain mining claims held by American Oil, a now abandoned
subsidiary of the Company. Due to lack of documentation and proper signature
guarantees, 167,301 of the shares subject to cancellation remain outstanding,
which shares have also been reported lost by the stockholder. Assuming the
stockholder will provide necessary documentation, these lost certificates may
be cancelled of record upon the Company's agreement to indemnify the transfer
agent and the reservation of an equal number shares against the possible
presentation of a lost certificate by a bona fide holder. In the event of
presentation of a lost certificate for transfer, the shares would be
transferred to the presenting bona fide holder from the shares reserved for
this purpose. In such event, the Company may pursue indemnification remedies
against the former stockholder under a lost stock indemnity agreement signed
by the former stockholder in October 1996.
61
<PAGE>
In September 1995, the Company also entered into a stock cancellation
agreement with another stockholder in which it was agreed that the shares held
by the stockholder would be cancelled. Due to the shares being lost and the
lack of proper documentation, the Company has been unable to cancel these
shares of record. The Company's attempts to locate the stockholder to correct
document deficiencies have been unsuccessful and the Company currently has
decided to abandon its efforts to do so. The Company is currently considering
obtaining a court order to cancel these shares of record.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is American
Securities Transfer and Trust, Inc., 1825 Lawrence Street, Suite 444, Denver,
Colorado 80202. Its telephone number is (303) 234-5300.
PREFERRED STOCK
As of June 18, 1997, there were no shares of Old ZMAX preferred stock issued
and outstanding. If issued, holders of Series A Preferred would be entitled to
convert each share of Series A Preferred into four shares of Common Stock of
the Company at any time at the option of the holder. In all other respects,
the voting powers, preferences, limitations, restrictions and relative rights
of the Series A Preferred are the same as those of the Common Stock.
None of the authorized preferred stock of New ZMAX is issued, outstanding or
designated as to class or series. The Board of Directors, without shareholder
approval, may issue preferred stock with voting and conversion rights that
could materially and adversely affect the voting power of the holders of
Common Stock. The issuance of preferred stock could also decrease the amount
of earnings and assets available for distribution to holders of Common Stock.
In addition, the issuance of preferred stock may have the effect of delaying,
deferring or preventing a change in control of the Company. At present, the
Company has no plans to issue any shares of preferred stock.
DEBENTURES
On December 6, 1996, Old ZMAX issued Debentures to 22 non-U.S., accredited
investor subscribers in the aggregate principal amount of $5,500,000. The term
of the Debentures is three years, with a maturity date of December 6, 1999.
The Debentures bear interest at the simple rate of 8% paid semiannually,
commencing on June 1, 1997.
The Company may redeem or prepay the Debentures in full or in part at any
time upon ten days' prior written notice to the holder without penalty or
premium or payment of unearned interest, provided that prior to such
redemption the Company has satisfied the following two conditions: (1) the
Company has made an offer to exchange the Debenture for shares of Common Stock
and Warrants on the terms described below; and (2) the Company has prepared,
filed and caused to be declared effective by the SEC a registration statement
pursuant to the Securities Act regarding such exchange offer. If the exchange
offer is made within six months of the date of issuance of the Debenture
(i.e., June 6, 1997), the terms of the exchange offer for each $1,000
principal amount of the Debenture are (i) 200 shares of Common Stock plus (ii)
one Warrant (a "Warrant") to purchase 200 shares of Common Stock. If the
exchange offer is made after the six-month anniversary of the Debenture, each
$1,000 principal amount of the Debenture may be exchanged for (i) 220 shares
of Common Stock plus (ii) one Warrant to purchase 220 shares of Common Stock.
Prior to the maturity date and prior to redemption by the Company, each
holder of a Debenture has the right to convert all, but not less than all, of
the principal balance of the Debenture into Common Stock of the Company at the
rate of one share for each $5 of the principal amount of the Debenture, in
complete satisfaction of all amounts due and payable under the Debenture.
62
<PAGE>
The Debentures are non-negotiable and non-transferable.
Debentures not exchanged in the Exchange Offer will become the obligation of
New ZMAX after the Effective Time of the Merger. The Company presently plans
to redeem for cash any Debentures remaining outstanding after completion of
the Exchange Offer at 100% of the principal amount plus interest accrued to
the date of redemption. See "The Exchange Offer."
WARRANTS
Warrants issued in the Exchange Offer ("Warrants") may be exercised at the
price of $7 per share if exercised prior to the first year after issuance of
the Warrant, and at the price of $8 per share if exercised during the period
between the first anniversary and the second anniversary of the date of
issuance of the Warrant. The Warrants expire on the second anniversary of the
date of issuance. The Warrants contain adjustment clauses for events such as
reorganization, consolidation, or merger of the Company, reclassification, and
payment of dividends. Each Warrant is transferable in whole or in part upon
the prior written consent of the Company. Warrants that are not exercised
prior to the Merger will become the obligation of New ZMAX after the Effective
Time of the Merger.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of Common Stock in the public market
could adversely affect prevailing market prices. Upon completion of the
Exchange Offer, the Merger and assuming the Warrants issued in the Exchange
Offer are exercised prior to the Effective Time of the Merger, 11,870,514
shares of New ZMAX Common Stock will be outstanding, including 150,000 shares
of Common Stock Old ZMAX has agreed to issue in connection with the
acquisition of the COCACT software. See "Management's Discussion and Analysis
of Financial Condition and Results of Operation--Recent Developments." The
Company believes that all of these will be freely transferable without
restriction under the Securities Act, except for any shares held by or for the
account of an "affiliate" of the Company, as that term is defined in Rule 144
promulgated under the Securities Act, or by an individual or entity subject to
a contractual restriction on resale.
In general, assuming certain public information regarding the Company is
available, Rule 144 permits a person (or persons whose shares are aggregated)
who has beneficially owned restricted securities within the meaning of Rule
144 ("Restricted Securities") for at least one year is entitled to sell within
any three-month period a number of shares that does not exceed the greater of:
(1) 1% of the then outstanding shares of the Company's Common Stock; or (ii)
the average weekly trading volume of the Company's Common Stock in the
applicable market during the four calendar weeks preceding the date of the
order to execute the transaction. Sales under Rule 144 are also subject to
certain manner of sale provisions, notice requirements and the availability of
current public information about the Company. Any person (or persons whose
shares are aggregated) who is not deemed to have been an affiliate of the
Company at any time during the 90 days preceding a sale, and who owns
Restricted Securities that were purchased from the Company (or any affiliate)
at least two years previously, is entitled to sell such shares under Rule
144(k) without regard to the volume limitations, manner of sale provisions,
public information requirements or notice requirements.
Approximately 1,820,000 shares of New ZMAX Common Stock will be reserved for
issuance to certain executives under its bonus program and upon the exercise
of options under the Company's equity incentive and option plans (the
"Plans"), of which 132,000 will be immediately exercisable following the
Effective Time of the Merger. The Company intends to file a registration
statement on Form S-8 to register the Common Stock reserved for issuance under
the Company's Plans. Shares of Common Stock issued under any of the Plans
after the effective date of a registration statement registering Common Stock
issued or issuable under a Plan, and Common Stock outstanding under such Plan,
will be eligible for resale in the open market, except for shares held by
affiliates and shares subject to any contractual restrictions.
STOCKHOLDERS' AGREEMENT
In connection with the Company's purchase of CSI, the former stockholders of
CSI entered into a stockholders' agreement with the Company dated November 6,
1996. This stockholders agreement contains restrictions on transfer and
various buy-sell arrangements between the former CSI stockholders and the
Company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--CSI Recapitalization" and "Compensation Committee
Report on Executive Compensation."
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<PAGE>
COMPARISON OF STOCKHOLDERS RIGHTS
Old ZMAX is incorporated under the laws of the State of Nevada and New ZMAX
will be incorporated under the laws of the State of Delaware. On consummation
of the Merger, the stockholders of Old ZMAX, whose rights currently are
governed by Nevada law and Old ZMAX's Articles of Incorporation and Bylaws
which were created pursuant to Nevada law, will become stockholders of a
Delaware company, New ZMAX, and their rights as stockholders will then be
governed by Delaware law and the New ZMAX Certificate of Incorporation and New
ZMAX Bylaws which were created under Delaware law.
Although the corporate statutes of Nevada and Delaware are substantially
similar, certain differences exist. The most significant differences, in the
judgment of the management of the Company, are summarized below. This summary
is not intended to be complete, and stockholders should refer to the Delaware
General Corporation Law (the "Delaware Law") and the Nevada Business
Corporation Act (the "Nevada Law") to understand how these laws will apply to
New ZMAX and Old ZMAX.
CLASSIFIED BOARD OF DIRECTORS
The Delaware Law permits any Delaware corporation to classify its board of
directors into as many as three classes as equally as possible with staggered
terms of office. After initial implementation of a classified board, one class
(consisting of approximately 1/3 of the entire board) will be elected at each
annual meeting of the stockholders to serve for a term of three years or until
their successors are elected and take office. The Nevada Law also permits
corporations to classify boards of directors provided that at least one-fourth
of the total number of directors is elected annually. Old ZMAX does not have a
classified board, but New ZMAX's board will be classified. For example, with
respect to removal of directors, under the Nevada Law, any one or all of the
directors of a corporation may be removed by the holders of not less than two-
thirds of the voting power of a corporation's stock. Nevada does not
distinguish between removal of directors with and without cause. Under the
Delaware Law, unless the certificate of incorporation otherwise provides,
directors of a corporation with a classified board may be removed only for
cause, by the holders of a majority of shares then entitled to vote in an
election of directors. The New ZMAX Certificate of Incorporation does not
provide for the removal of directors without cause and, therefore, New ZMAX
directors may only be removed for cause.
CUMULATIVE VOTING
Cumulative voting for directors entitles stockholders to cast a number of
votes that is equal to the number of voting shares held multiplied by the
number of directors to be elected. Stockholders may cast all such votes either
for one nominee or distribute such votes among up to as many candidates as
there are positions to be filled. Cumulative voting may enable a minority
stockholder or group of stockholders to elect at least one representative to
the board of directors where such stockholders would not otherwise be able to
elect any directors.
The Nevada Law permits cumulative voting in the election of directors as
long as certain procedures are followed. A Delaware corporation may provide
for cumulative voting in the corporation's certificate of incorporation. Old
ZMAX opted out of cumulative voting by including an appropriate provision in
its Articles of Incorporation. New ZMAX also will not adopt cumulative voting
because the New ZMAX Certificate of Incorporation will not provide for
cumulative voting in the election of directors.
Since neither Old ZMAX nor New ZMAX utilizes cumulative voting, there will
be no difference in stockholders' rights with respect to this issue.
VACANCIES
Under the Delaware Law, subject to the rights, if any, of any series of
preferred stock to elect directors and to fill vacancies on the board of
directors, vacancies on the board of directors will be filled by the
affirmative
65
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vote of a majority of the remaining directors then in office, even if less
than a quorum. Any director so appointed will hold office for the remainder of
the full term of the class of directors in which the vacancy occurred.
Similarly, the Nevada Law provides that vacancies may be filled by a majority
of the remaining directors, though less than a quorum, unless the articles of
incorporation provide otherwise. In addition, the by-laws of Old ZMAX and New
ZMAX address the issue of director vacancies in the same manner. Therefore,
the change from Nevada law to Delaware law will not alter stockholders' rights
with respect to filling vacancies.
INDEMNIFICATION OF OFFICERS AND DIRECTORS AND ADVANCEMENT OF EXPENSES
Delaware and Nevada have substantially identical provisions regarding
indemnification by a corporation of its officers, directors, employees and
agents, except Nevada provides broader indemnification in connection with
stockholder derivative lawsuits. Delaware and Nevada law differ in their
provisions for advancement of expenses incurred by an officer or director in
defending a civil or criminal action, suit or proceeding. The Delaware Law
provides that expenses incurred by an officer or director in defending any
civil, criminal, administrative or investigative action, suit or proceeding
may be paid by the corporation in advance of the final disposition of the
action, suit or proceeding upon receipt of an undertaking by or on behalf of
the director or officer to repay the amount if it is ultimately determined
that he or she is not entitled to be indemnified by the corporation. Thus, a
Delaware corporation has the discretion to decide whether or not to advance
expenses. Under the Nevada Law, the articles of incorporation, bylaws or an
agreement made by the corporation may provide that the corporation must pay
advancements of expenses in advance of the final disposition of the action,
suit or proceedings upon receipt of an undertaking by or on behalf of the
director or officer to repay the amount if it is ultimately determined that he
or she is not entitled to be indemnified by the corporation. Thus, a
corporation may have no discretion to decide whether or not to advance
expenses. There will be no difference in stockholders' rights with respect to
this issue because the Old ZMAX Articles of Incorporation and the New ZMAX
Certificate of Incorporation to be in effect after the Merger each provide for
advancement of expenses.
New ZMAX will be obligated to indemnify a narrower range of people than Old
ZMAX. Whereas the Old ZMAX Articles of Incorporation provide for Old ZMAX to
indemnify directors, officers, employees and some agents, the New ZMAX
Certificate of Incorporation only addresses indemnification of directors. In
this regard, it should be noted that the New ZMAX Board of Directors retains
the discretionary authority to authorize the indemnification of officers,
employees and agents, subject to certain conditions under the Delaware Law.
LIMITATION ON PERSONAL LIABILITY OF DIRECTORS
A Delaware corporation is permitted to adopt provisions in its certificate
of incorporation limiting or eliminating the liability of a director to a
company and its stockholders for monetary damages for breach of fiduciary duty
as a director, provided that such liability does not arise from certain
proscribed conduct, including breach of the duty of loyalty, acts or omissions
not in good faith or which involve intentional misconduct or a knowing
violation of law or liability to the corporation based on unlawful dividends
or distributions or improper personal benefit. The New ZMAX Certificate of
Incorporation will limit the liability of directors to the Company to the
fullest extent permitted by law.
While the Nevada Law has a similar provision permitting the adoption of
provisions in the articles of incorporation limiting personal liability, the
Nevada provision differs in two respects. First, the Nevada provisions applies
to both directors and officers. Second, while the Delaware provisions excepts
from limitation on liability of breach of the duty of loyalty, the Nevada
counterpart does not contain this exception. Thus, the Nevada provision
expressly permits a corporation to limit the liability of officers, as well as
directors, and permits limitation of liability arising from a breach of the
duty of loyalty. The Old ZMAX Articles of Incorporation limited the liability
to the Company of directors, officers, employees and agents. Therefore, New
ZMAX will adopt a narrower limitation on liability, and more parties will
remain potentially liable to the Company. The Company, however, may determine
to indemnify such persons in its discretion subject to the conditions of the
Delaware Law.
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DIVIDENDS
The Delaware Law is more restrictive than the Nevada Law with respect to
when dividends may be paid. Under the Delaware Law, unless otherwise provided
in the certificate of incorporation, a corporation may declare dividends, out
of surplus, or if no surplus exists, out of net profits for the fiscal year in
which the dividend is declared and/or the preceding fiscal year (provided that
the amount of capital of the corporation following the declaration and payment
of the dividend is not less than the aggregate amount of the capital
represented by the issued and outstanding stock of all classes having a
preference upon the distribution of assets). In addition, the Delaware Law
provides that a corporation may redeem its shares only out of surplus.
The Nevada Law provides that no distribution (including dividends on, or
redemption or repurchases of, shares of capital stock) may be made if, after
giving effect to such distribution, the corporation would not be able to pay
its debts as they become due in the usual course of business, or the
corporation's total assets would be less than the sum of its total liabilities
plus the amount that would be needed at the time of a liquidation to satisfy
the preferential rights of preferred stockholders.
RESTRICTIONS ON BUSINESS COMBINATIONS
Both the Delaware Law and the Nevada Law contain provisions restricting the
ability of a corporation to engage in business combinations with an interested
stockholder. Under the Delaware Law, a corporation is not permitted to engage
in a business combination with any interested stockholder for a three-year
period following the date such stockholder became an interested stockholder,
unless (i) the transaction resulting in a person becoming an interested
stockholder, or the business combination, is approved by the board of
directors of the corporation before the person becomes an interested
stockholder; (ii) the interested stockholder acquires 85% or more of the
outstanding voting stock of the corporation in the same transaction that makes
it an interested stockholder (excluding shares owned by persons who are both
officers and directors of the corporation, and shares held by certain employee
stock ownership plans); or (iii) on or after the date the person becomes an
interested stockholder, the business combination is approved by the
corporation's board of directors and by the holders of at least 66% of the
corporation's outstanding voting stock at an annual or special meeting,
excluding shares owned by the interested stockholder. The Delaware Law defines
"interested stockholder" generally as a person who owns 15% or more of the
outstanding shares of a corporation's voting stock.
The Nevada Law regulates business combinations more stringently. First, an
interested stockholder is defined as a beneficial owner of ten percent (10%)
or more of the voting power. Second, the three-year moratorium can be lifted
only by advance approval by a corporation's board of directors, as opposed to
Delaware's provision that allows interested stockholder combinations at the
time of the transaction with stockholder approval. Finally, after the three-
year period, combinations remain prohibited unless (i) they are approved by
the board of directors, the disinterested stockholders or a majority of the
outstanding voting power not beneficially owned by the interested party, or
(ii) the interested stockholders satisfy certain fair value requirements. As
in Delaware, a Nevada corporation may opt-out of the statute with appropriate
provisions in its articles of incorporation.
AMENDMENT TO CERTIFICATE/ARTICLES OF INCORPORATION AND BYLAWS
Both the Delaware Law and the Nevada Law require the approval of the holders
of a majority of all outstanding shares entitled to vote, with each
stockholder being entitled to one vote for each share so held, to approve
proposed amendments to a corporation's certificate/articles of incorporation.
Neither state requires stockholder approval for the board of directors of a
corporation to fix the voting powers, designation, preferences, limitations,
restrictions and rights of a class of stock provided that the corporation's
organizational documents grant such power to its board of directors. The
holders of the outstanding shares of a particular class are entitled to vote
as a class on a proposed amendment if the amendment would alter or change the
power, preferences or special rights of one or more series of any class so as
to affect them adversely. The number of authorized shares of any such class of
stock may be increased or decreased (but not below the number of shares then
outstanding) by the affirmative vote of the holders of a majority of the stock
entitled to vote thereon (without a class vote) if so provided in any
amendment to the articles of incorporation or resolutions creating such class
of stock.
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ACTIONS BY WRITTEN CONSENT OF STOCKHOLDERS
The Nevada Law and the Delaware Law each provide that, unless the charter
provides otherwise, any action required or permitted to be taken at a meeting
of the stockholders may be taken without a meeting if the holders of
outstanding stock having at least the minimum number of votes that would be
necessary to authorize or take such action at a meeting consents to the action
in writing. In addition, the Delaware Law requires the corporation to give
prompt notice of the taking of corporate action without a meeting by less than
unanimous written consent to those stockholders who did not consent in
writing. The Old ZMAX Articles of Incorporation did not limit stockholder
action by written consent, whereas the New ZMAX Certificate of Incorporation
prohibits written consent action unless signed by all stockholders. Therefore,
as stockholders of New ZMAX, the former Old ZMAX stockholders will no longer
have the right to act by majority written consent, unless and until the New
ZMAX Certificate of Incorporation is amended to so provide.
STOCKHOLDER VOTE FOR MERGERS AND OTHER CORPORATE REORGANIZATIONS
In general, both jurisdictions require authorization by an absolute majority
of outstanding shares entitled to vote, as well as approval by the board of
directors with respect to the terms of a merger or a sale of substantially all
of the assets of the corporation. Neither the Nevada Law nor the Delaware Law
requires stockholder approval by the stockholders of a surviving corporation
in a merger or consolidation as long as the surviving corporation issues no
more than 20% of its voting stock in the transaction.
DISSENTERS' RIGHTS
In both jurisdictions, dissenting stockholders of a corporation engaged in
certain major corporate transactions are entitled to appraisal rights.
Appraisal rights permit a stockholder to receive cash equal to the fair market
value of the stockholder's shares (as determined by agreement of the parties
or by a court), in lieu of the consideration such stockholder would otherwise
receive in any such transaction.
Under the Delaware Law, appraisal rights are generally available for the
shares of any class or series of stock of a Delaware corporation in a merger
or consolidation, provided that no appraisal rights are available for the
shares of any class or series of stock which, at the record date for the
meeting held to approve such transaction, were either (i) listed on a national
security exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. ("NASD") or (ii) held of record by more than 2,000 stockholders.
Even if the shares of any class or series of stock meet the requirements of
clause (i) or (ii) above, appraisal rights are available for such class or
series if the holders thereof receive in the merger or consolidation anything
except: (i) shares of stock of the corporation surviving or resulting from
such merger or consolidation; (ii) shares of stock of any other corporation
which at the effective date of the merger or consolidation is either listed on
a national securities exchange, or designated as a national market system
security on an interdealer quotation system by the NASD or held of record by
more than 2,000 stockholders; (iii) cash in lieu of fractional shares; or (iv)
any combination of the foregoing. No appraisal rights are available to
stockholders of the surviving corporation if the merger did not require their
approval.
Under the Nevada Law, a stockholder is entitled to dissent from, and obtain
payment for the fair value of his or her shares in the event of consummation
of a plan of merger or plan of exchange in which the corporation is a party
and, to the extent that the articles of incorporation, bylaws or a resolution
of the board of directors provides that voting or nonvoting stockholders are
entitled to dissent and obtain payment for their shares any corporate action
taken pursuant to a vote of the stockholders. As with the Delaware Law, the
Nevada Law provides an exception to dissenters' rights. Holders of securities
(i) listed on a national securities exchange or designated as a national
market system security on an interdealer quotation system by the NASD or (ii)
held by more than 2,000 stockholders of record are generally not entitled to
dissenters' rights.
STOCKHOLDER INSPECTION RIGHTS
The Delaware Law grants any stockholder the right to inspect and to copy for
any proper purpose the corporation's stock ledger, a list of its stockholders,
and its other records. A proper purpose is one reasonably
68
<PAGE>
related to such person's interest as a stockholder. Directors also have the
right to examine the corporation's stock ledger, a list of its stockholders
and its other records for a purpose reasonably related to their positions as
directors.
The Nevada Law provides the right to inspect the corporation's financial
records for only a shareholder who (i) owns at least 15% of the corporation's
issued and outstanding shares, or (ii) has been authorized in writing by the
holder(s) of at least 15% of the issued and outstanding shares. To inspect the
corporation's stock ledger, the stockholder must have been a stockholder of
record for six months prior to demanding inspection.
DERIVATIVE SUITS
Under both the Delaware Law and the Nevada Law, a stockholder may bring a
derivative action on behalf of the corporation only if the stockholder was a
stockholder of the corporation at the time of the transaction in question or
the stockholder acquired the stock thereafter by operation of law.
SPECIAL MEETINGS OF STOCKHOLDERS
Both the Delaware Law permits special meetings of stockholders to be called
by the board of directors or by any other person authorized in the certificate
of incorporation or bylaws to call a special stockholder meeting. The Nevada
Law does not address the manner in which special meetings of stockholders may
be called. The Old ZMAX Bylaws provide that special meetings of the
stockholders may be called by the President or a director, and that the
President must call such a meeting if requested by beneficial holders of at
least 10% of the outstanding shares of stock of the Company. Similarly, the
New ZMAX Bylaws provide that the President or a director may call a special
meeting of the stockholders, but the New ZMAX Bylaws do not require the
President to call such a meeting unless beneficial holders of at least 25% of
the outstanding shares of stock so request. Since New ZMAX requires a greater
number of shares to force a special meeting of stockholders, it could be more
difficult for the stockholders to force a special meeting as stockholders of
New ZMAX than when they were stockholders of Old ZMAX.
STOCKHOLDER PROPOSALS FOR 1998 ANNUAL MEETING
Any stockholder of the Company wishing to submit a proposal for action at
the Company's 1998 annual Meeting of Stockholders and desiring the proposal to
be considered for inclusion in the Company's proxy materials must provide a
written copy of the proposal to the management of the Company at its principal
executive office not later than , 1998, and must otherwise comply with
rules of the SEC relating to stockholder proposals.
LEGAL MATTERS
The validity of the New ZMAX securities offered hereby will be passed upon
by Powell, Goldstein, Frazer & Murphy, LLP of Atlanta, Georgia and Washington,
D.C. The validity of the Old ZMAX securities offered hereby will be passed
upon by Erwin Thompson & Hascheff of Reno, Nevada.
EXPERTS
The consolidated financial statements of ZMAX Corporation (formerly known as
Mediterranean Oil Corporation and Oryx Gold Corporation) as of December 31,
1996, and for the year then ended, appearing in this Proxy
Statement/Prospectus have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report, and are included herein in
reliance upon the authority of said firm as experts in giving such reports.
The financial statements of ZMAX Corporation (formerly known as
Mediterranean Oil Corporation and Oryx Gold Corporation) as of December 31,
1995, and for years ended December 31, 1995 and 1994, appearing in this Proxy
Statement/Prospectus have been audited by Amisano Hanson, Chartered
Accountants, independent public accountants, as indicated in their report, and
are included herein in reliance upon the authority of said firm as experts in
giving such reports.
69
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
ZMAX CORPORATION (A DEVELOPMENT STAGE COMPANY) ----
<S> <C>
Report of Arthur Andersen LLP, Independent Public Accountants............ F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996 and March
31, 1997................................................................ F-3
Consolidated Statements of Operations for the period from December 13,
1995 (Date of Inception) to December 31, 1995, for the year ended
December 31, 1996, for the period from December 13, 1995 (Date of
Inception) to December 31, 1996, for the three months ended March 31,
1996 and 1997, and for the period from December 13, 1995 (Date of
Inception) to March 31, 1997............................................ F-4
Consolidated Statements of Stockholders Equity (Deficit) for the period
from December 13, 1995 (Date of Inception) to December 31, 1996, and for
the three months ended March 31, 1997................................... F-5
Consolidated Statements of Cash Flows for the period from December 13,
1995 (Date of Inception) to December 31, 1995, for the year ended
December 31, 1996, for the period from December 13, 1995 (Date of
Inception) to December 31, 1996, for the three months ended March 31,
1996 and 1997, and for the period from December 13, 1995 (Date of
Inception) to March 31, 1997............................................ F-6
Notes to Consolidated Financial Statements............................... F-7
MEDITERRANEAN OIL CORPORATION (FORMERLY ORYX GOLD CORPORATION) (A
DEVELOPMENT STAGE COMPANY)
Report of Amisano Hanson, Chartered Accountants.......................... F-24
Balance Sheets as at December 31, 1994 and 1995.......................... F-25
Statements of Operations for the years ended December 31, 1993, 1994 and
1995, and for the period from April 24, 1986 (Date of Inception) to
December 31, 1995....................................................... F-26
Statements of Stockholders Equity (Deficiency) for the period from April
24, 1986 to December 31, 1995........................................... F-27
Statements of Cash Flows for the years ended December 31, 1993, 1994 and
1995, and for the period from April 24, 1986 (Date of Inception) to
December 31, 1995....................................................... F-28
Notes to the Financial Statements........................................ F-29
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To ZMAX Corporation:
We have audited the accompanying consolidated balance sheets of ZMAX
Corporation (a Nevada corporation in the development stage) and its subsidiary
as of December 31, 1995 and 1996, and the related statements of operations,
stockholders' equity (deficit), and cash flows for the period from inception
(December 13, 1995) to December 31, 1995, for the year ended December 31, 1996
and for the period from inception (December 13, 1995) to December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatements. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statements presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ZMAX Corporation and its
subsidiary as of December 31, 1995 and 1996, and the results of its operations
and its cash flows for the period from inception to December 31, 1995, for the
year ended December 31, 1996 and for the period from inception to December 31,
1996, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Washington, D.C.
June 17, 1997
F-2
<PAGE>
ZMAX CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
MARCH 31,
1995 1996 1997
-------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash.................................. $ -- $ 4,842,169 $ 3,731,416
Prepaid expenses and other assets..... -- 27,762 10,113
-------- ----------- -----------
Total current assets................ -- 4,869,931 3,741,529
-------- ----------- -----------
Property and equipment, net........... -- 20,871 186,908
Intangible assets, net................ 110,000 2,778,894 2,630,285
Deferred financing costs, net......... -- 1,426,834 1,277,867
-------- ----------- -----------
Total assets........................ $110,000 $ 9,096,530 $ 7,836,589
======== =========== ===========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable and accrued
expenses............................. $110,000 $ 370,175 $ 518,825
Convertible notes..................... -- 1,508,592 2,100,000
Current portion of long-term debt..... -- 265,630 136,054
-------- ----------- -----------
Total current liabilities........... 110,000 2,144,397 2,754,879
-------- ----------- -----------
Convertible exchangeable subordinated
debentures........................... -- 5,500,000 5,500,000
Long-term debt, net of current
portion.............................. -- 527,857 527,857
Deferred income taxes................. -- 504,488 478,392
-------- ----------- -----------
Total liabilities................... 110,000 8,676,742 9,261,128
-------- ----------- -----------
Commitments and contingencies (Notes 6,
10, 11 and 12)
Stockholders' (deficit) 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,
400,000, 7,000,079 and 6,704,072
shares issued and outstanding as of
December 31, 1995, 1996 and March 31,
1997, respectively, 2,800,000 shares
issued in escrow as of December 31,
1996 and March 31, 1997 (Note 4),
775,808 and 479,801 shares subject to
cancellation agreements as of
December 31, 1996, and March 31,
1997, respectively (Note 9).......... 400 4,200 4,200
Additional paid-in capital............ (200) 6,727,764 7,027,764
Issuable common stock, 904,365 shares
issuable as of December 31, 1996 and
March 31, 1997 (Note 4).............. -- 5,299,579 5,299,579
Receivable for stock subscription
(Note 4)............................. (200) (105,000) (105,000)
Deficit accumulated during the
development stage.................... -- (11,506,755) (13,651,082)
-------- ----------- -----------
Total stockholders' (deficit)
equity............................. -- 419,788 (1,424,539)
-------- ----------- -----------
Total liabilities and stockholders'
(deficit) equity................... $ -- $ 9,096,530 $ 7,836,589
======== =========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE>
ZMAX CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
DECEMBER 13, 1995
DECEMBER 13, 1995 (DATE OF THREE MONTHS ENDED
(DATE OF INCEPTION) YEAR ENDED INCEPTION) TO MARCH 31, DECEMBER 13, 1995
TO DECEMBER 31, DECEMBER 31, DECEMBER 31, --------------------- (DATE OF INCEPTION)
1995 1996 1996 1996 1997 TO MARCH 31, 1997
------------------- ------------ ----------------- -------- ----------- -------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Operating Expenses:
Sales and marketing.. $ -- $ 228,803 $ 228,803 $ -- $ 157,748 $ 386,551
General and
administrative...... -- 1,087,077 1,087,077 46,814 1,019,195 2,106,272
Amortization and
depreciation........ -- 193,533 193,533 -- 154,730 348,263
------- ------------ ------------ -------- ----------- -----------
Loss from
operations........ -- (1,509,413) (1,509,413) (46,814) (1,331,673) (2,841,086)
Other income (expense):
Interest income...... -- 14,248 14,248 -- 49,478 63,726
Interest expense..... -- (7,125,386) (7,125,386) -- (889,446) (8,014,832)
Other................ -- (2,903,600) (2,903,600) -- 1,218 (2,902,382)
------- ------------ ------------ -------- ----------- -----------
Net loss before
benefit for income
taxes............. -- (11,524,151) (11,524,151) (46,814) (2,170,423) (13,694,574)
Benefit for income
taxes............. -- 17,396 17,396 -- 26,096 43,492
------- ------------ ------------ -------- ----------- -----------
Net loss........... $ -- $(11,506,755) $(11,506,755) $(46,814) $(2,144,327) (13,651,082)
======= ============ ============ ======== =========== ===========
Net loss per share..... $ -- $ (13.45) $ (0.12) $ (0.63)
------- ------------ -------- -----------
Weighted average shares
outstanding........... 400,000 855,712 400,000 3,424,271
======= ============ ======== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
ZMAX CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
COMMON STOCK ADDITIONAL ISSUABLE RECEIVABLE DURING THE
----------------- PAID-IN COMMON FOR STOCK DEVELOPMENT
SHARES AMOUNT CAPITAL STOCK SUBSCRIPTION STAGE TOTAL
--------- ------ ---------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 13,
1995 (Date of
Inception)............. -- $ -- $ -- $ -- $ -- $ -- $ --
Initial
capitalization........ 400,000 400 (200) -- (200) -- --
--------- ------ ---------- ---------- --------- ------------ ------------
Balance, December 31,
1995................... 400,000 400 (200) -- (200) -- --
Adjustment to record
existing
capitalization of
public shell company
November 6, 1996...... 3,800,079 3,800 807,964 1,373,379 200 -- 2,185,343
Common stock issued in
escrow in connection
with the CSI
recapitalization ..... 2,800,000 -- -- -- -- -- --
Common stock issuable
in connection with the
CSI recapitalization,
320,000 shares, $5.86
per share............. -- -- -- 1,875,200 -- 1,875,200
Common stock issuable
in connection with the
CSI recapitalization,
350,000 shares, $5.86
per share, net of
subscription proceeds
of $0.30.............. 2,051,000 (105,000) 1,946,000
Stock compensation
expense............... -- -- 300,000 -- -- -- 300,000
Allocation of proceeds
of Notes to beneficial
conversion feature.... -- -- 120,000 -- -- -- 120,000
Allocation of proceeds
of Debentures to
beneficial conversion
feature............... 5,500,000 5,500,000
Net loss............... (11,506,755) (11,506,755)
--------- ------ ---------- ---------- --------- ------------ ------------
Balance, December 31,
1996................... 7,000,079 4,200 6,727,764 5,299,579 (105,000) (11,506,755) 419,788
Cancellation of shares
(unaudited)........... (296,007) -- -- -- -- -- --
Stock compensation
expense (unaudited)... -- -- 300,000 -- -- -- 300,000
Net loss (unaudited)... -- -- -- -- -- (2,144,327) (2,144,327)
--------- ------ ---------- ---------- --------- ------------ ------------
Balance, March 31, 1997
(unaudited)............ 6,704,072 $4,200 $7,027,764 $5,299,579 $(105,000) $(13,651,082) $ (1,424,539)
========= ====== ========== ========== ========= ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
ZMAX CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 13, 1995 DECEMBER 13, 1995
DECEMBER 13, 1995 (DATE OF THREE MONTHS (DATE OF
(DATE OF INCEPTION) YEAR ENDED INCEPTION) TO ENDED MARCH 31, INCEPTION) TO
TO DECEMBER 31, DECEMBER 31, DECEMBER 31, --------------------- MARCH 31,
1995 1996 1996 1996 1997 1997
------------------- ------------ ----------------- -------- ----------- -----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss............... $ -- $(11,506,755) $(11,506,755) $(46,814) $(2,144,327) $(13,651,082)
Adjustments to
reconcile loss to net
cash used in operating
activities
Depreciation and
amortization expense.. -- 193,533 193,533 -- 154,730 348,263
Amortization of
deferred financing
costs................. -- 185,767 185,767 -- 148,967 334,734
Amortization of
discount on Notes and
Debentures............ -- 7,008,592 7,008,592 -- 591,408 7,600,000
Non-cash expenses
related to CSI
recapitalization...... -- 2,883,600 2,883,600 -- -- 2,883,600
Stock compensation
expense............... -- 300,000 300,000 -- 300,000 600,000
Changes in assets and
liabilities
Prepaid expenses....... -- (27,762) (27,762) -- 17,649 (10,113)
Accounts payable....... 110,000 72,966 182,966 46,814 148,650 331,616
Deferred income taxes.. -- (17,396) (17,396) -- (26,096) (43,492)
-------- ------------ ------------ -------- ----------- ------------
Net cash used in
operating
activities........... 110,000 (907,455) (797,455) -- (809,019) (1,606,474)
-------- ------------ ------------ -------- ----------- ------------
Net cash used in
investing activities:
Purchases of property.. -- (21,144) (21,144) -- (172,158) (193,302)
Purchases of software.. (110,000) (831,892) (941,892) -- -- (941,892)
-------- ------------ ------------ -------- ----------- ------------
Net cash used in
investing
activities........... (110,000) (853,036) (963,036) -- (172,158) (1,135,194)
Net cash provided by
financing activities:
Proceeds from issuance
of convertible notes.. -- 120,000 120,000 -- -- 120,000
Proceeds from issuance
of convertible
exchangeable
subordinated
debentures............ -- 5,500,000 5,500,000 -- -- 5,500,000
Deferred financing
costs................. -- (675,000) (675,000) -- -- (675,000)
Net borrowings
(payments) on long-
term obligations...... -- 408,487 408,487 -- (129,576) 278,911
Cash acquired in CSI
recapitalization...... -- 299,173 299,173 -- -- 299,173
Advances from joint
venture and ZMAX prior
to the CSI
recapitalization...... -- 950,000 950,000 -- -- 950,000
-------- ------------ ------------ -------- ----------- ------------
Net cash provided by
(used in) financing
activities........... -- 6,602,660 6,602,660 -- (129,576) 6,473,084
Net increase
(decrease) in cash... -- 4,842,169 4,842,169 -- (1,110,753) 3,731,416
-------- ------------ ------------ -------- ----------- ------------
Cash, beginning of
period................. -- -- -- -- 4,842,169 --
-------- ------------ ------------ -------- ----------- ------------
Cash, end of period..... $ -- $ 4,842,169 $ 4,842,169 $ -- $ 3,731,416 $ 3,731,416
======== ============ ============ ======== =========== ============
Supplemental cash flow
information:
Cash paid for--
Interest............... -- 26,599 -- 200,067
Taxes.................. -- -- -- --
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
ZMAX CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996
1. BASIS OF PRESENTATION, ORGANIZATION, AND NATURE OF OPERATIONS:
Basis of Presentation
On November 6, 1996, ZMAX Corporation ("ZMAX"), 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, the acquisition has been treated as a
recapitalization of CSI with CSI as the acquirer (a reverse acquisition). The
historical financial statements prior to November 6, 1996 are those of CSI.
The accompanying consolidated financial statements include all of the accounts
of CSI and the accounts of ZMAX for the period from the acquisition on
November 6, 1996, through December 31, 1996. All significant intercompany
amounts have been eliminated.
ZMAX and its subsidiary, CSI (together the "Company"), are considered
development stage companies as defined by Statement of Financial Accounting
Standards ("SFAS") No. 7, "Accounting and Reporting by Development Stage
Enterprises." All losses since inception are considered development stage
activities and are presented on the basis described above.
Organization of ZMAX
ZMAX was incorporated as a Nevada corporation on April 24, 1986, under the
name of Pandora, Inc. ("Pandora"), for the purpose of creating a vehicle to
obtain capital to seek out, investigate and acquire interests in products,
properties and businesses which, in the opinion of management, may have
potential for profit. Until May 4, 1992, Pandora transacted no business other
than the investigation of various business opportunities. On May 4, 1992,
Pandora amended its Articles of Incorporation to change the name of the
Company to Oryx Gold Corporation ("Oryx") in connection with a reorganization
in which Oryx acquired 100% ownership of American Oil and Gas Corporation
("American Oil"). American Oil was organized on November 22, 1991, as a Nevada
corporation, and conducted no business other than the acquisition of an
interest in certain unpatented placer mining claims in Nevada. Oryx intended
to develop the mining claims and other acquired interests and, on August 16,
1995, changed its name to Mediterranean Oil Corporation ("Mediterranean") to
more accurately reflect the nature of its business. The Company did not
subsequently pursue this business. American Oil's corporate status has been
suspended by the Secretary of State of Nevada as of December 1, 1995, and this
subsidiary has been abandoned. On August 9, 1996, Mediterranean changed its
name to ZMAX Corporation.
Nature of Operations
Prior to the CSI transaction, ZMAX's activities consisted of efforts to
establish a new business and raise capital. The operations of CSI consisted of
activities to obtain financing, to acquire and develop its proprietary Year
2000 software re-engineering tools and methodologies, and to market its
services to potential customers. Since the acquisition of CSI, the Company has
been focused on the software re-engineering market. The Company has not yet
generated any revenues and has no assurance of future revenues. Even if
marketing efforts are successful, substantial time will pass before
significant revenues will be realized and, during this period, the Company may
require additional funds that may not be available to it.
F-7
<PAGE>
ZMAX CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has limited experience in providing its Year 2000 or
"millennium" services. The Company has not completed a large-scale millennium
conversion project either alone or together with a strategic partner. There
can be no assurance that the Company will be successful in completing large-
scale conversions, that the Company will not experience delays or failures in
providing its millennium services, or that its millennium services will be
effective. The failure of the Company's Year 2000 methodology to function
properly or the existence of significant errors or bugs following completion
of millennium conversions could necessitate significant expenditures by the
Company to remedy the problem. The consequences of failures, errors or bugs
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 and undeveloped
markets for millennium services, current and potential competitors with
greater financial, technological, production and marketing resources, 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. In addition, there are risks associated with the market
activity in ZMAX stock. The potential volatility of the stock price is
demonstrated by the quoted market price compared to the prices in the CSI
recapitalization transactions. The limited public information on the Company
and its security holders and the limitations on the ability to enforce
securities laws against non-U.S. persons also creates risk.
2. EXCHANGE OFFER AND PROPOSED MERGER
Exchange Offer
In connection with the offer anticipated by this prospectus, the Company
will offer (the "Exchange Offer") to exchange $5,500,000 of outstanding
Convertible Exchangeable Subordinated Debentures (the "Debentures") under the
terms and conditions included in this prospectus. Each Debenture holder will
receive 220 shares of common stock and a warrant to purchase 220 shares of
common stock (the "Warrant Shares") per $1,000 principal amount of Debentures
exchanged (see Note 7). Any accrued but unpaid interest from June 1, 1997 (the
most recent interest payment date) to the date of the exchange will be waived
by the Debenture holder. Following
F-8
<PAGE>
ZMAX CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the Exchange Offer, the Company intends to redeem any Debentures still
outstanding at 100% of the principal amount pursuant to the terms of the
Debentures, plus any interest accrued thereon to the date of redemption.
Because the securities to be issued pursuant to the terms of the Exchange
Offer include securities in excess of the securities issuable pursuant to the
original conversion terms of the Debentures (see Note 7), the Company will
recognize as expense, at the time of the exchange, the fair value of the
securities issued upon the exchange of the Debentures in excess of the fair
value of the securities issuable pursuant to the original conversion terms of
the Debentures. The amount of the expense will equal the fair value of the
incremental number of shares of common stock issued in the exchange in excess
of the number of shares issuable upon conversion of the Debentures in
accordance with their terms plus the fair value of the warrants issued in the
exchange.
Proposed Merger (the "Merger")
ZMAX proposes to merge with and into New ZMAX Corporation, a Delaware
corporation ("New ZMAX"), pursuant to an Agreement and Plan of Merger between
ZMAX and New ZMAX (the "Merger Agreement"). At the time the Merger becomes
effective (the "Effective Time"), each outstanding share of Common Stock,
$0.001 par value, of ZMAX ("Old ZMAX Common Stock") will be converted into the
right to receive, and will be exchangeable for one share of Common Stock,
$0.001 par value, of New ZMAX ("New ZMAX Common Stock"). At the Effective Time
of the Merger, ZMAX will be merged with and into New ZMAX and ZMAX will cease
to exist as a corporation. New ZMAX will be the surviving corporation in the
Merger, and CSI will thereby become a wholly owned subsidiary of New ZMAX.
Stockholders who oppose the proposed Merger will have the right to receive
payment for the value of their shares under Nevada law. In addition, if
beneficial owners of more than 5% of the issued and outstanding shares of ZMAX
Common Stock exercise their dissenters' rights, the Company may abandon the
Merger.
The exchange of at least 90% of the Debentures for ZMAX Common Stock and the
exercise of Warrants for at least 80% of the Warrant Shares are conditions to
the consummation of the Merger. Approval of the Merger also requires the
affirmative vote of the holders of a majority of the outstanding shares of
ZMAX Common Stock entitled to vote.
The authorized capital stock of the ZMAX consists of 95,000,000 shares of
Old ZMAX Common Stock and 10,000,000 shares of preferred stock, of which
5,000,000 shares have been designated as Series A Preferred Shares. Upon
completion of the Merger, the authorized capital stock of New ZMAX will
consist of 50,000,000 shares of Common Stock and 10,000,000 shares of
Preferred Stock. The authorized shares have been retroactively adjusted to
give effect to this event. This action is subject to the consummation of the
Merger.
3. SIGNIFICANT ACCOUNTING POLICIES:
Use of Estimates
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
F-9
<PAGE>
ZMAX CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
Cash and Cash Equivalents
Investments with original maturities of three months or less are considered
cash equivalents for purposes of these financial statements.
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.
Long-Lived Assets
The Company reviews its long-lived assets, including property and equipment,
identifiable intangibles, and goodwill whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be fully
recoverable. To determine recoverability of its long-lived assets, the Company
evaluates the probability that future undiscounted net cash flows will be less
than the carrying amount of the assets.
Software Development Costs
SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed," requires the capitalization of certain computer
software development costs incurred after technological feasibility is
established. Amounts that could have been capitalized under this statement
were immaterial and have not been capitalized.
Net Loss Per Share
Net loss per share for the period from December 13, 1995 (date of inception)
to December 31, 1995 and for the year ended December 31, 1996 and the three
months ended March 31, 1996 and 1997 is based upon the weighted-average number
of common equivalent shares outstanding during the period. The effects of
outstanding options and convertible debt on net loss per share are not
included because such effects would be anti-dilutive. Outstanding shares
subject to cancellation agreements (see Note 9) are also not included. Fully
diluted earnings per share are not presented because the difference between
these amounts and amounts presented is not material.
Interim Financial Information
The unaudited consolidated financial statements as of March 31, 1997, and
for the three months ended March 31, 1996 and 1997, presented herein have been
prepared by the Company without audit, pursuant to the rules and resolutions
of the Securities and Exchange Commission. The financial statements reflect
all adjustments (consisting of normal recurring adjustments) which, in the
opinion of management are necessary to present fairly the financial position,
results of operations and cash flows of the Company as of March 31, 1996 and
1997, and for the three months then ended. The results of operations for the
three months ended March 31, 1997 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1997.
F-10
<PAGE>
ZMAX CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. CSI RECAPITALIZATION AND ACQUISITION OF JOINT VENTURE INTEREST:
In connection with the recapitalization of CSI, ZMAX issued 2,800,000 shares
of common stock at $0.30 per share (see Note 9), $2,100,000 of convertible
notes (see Note 7) and $5,500,000 of convertible exchangeable subordinated
debentures (see Note 7).
Fiserv Century Services Joint Venture
On April 17, 1996, CSI formed the Fiserv Century Services Joint Venture (the
"JV") with Fiserv Federal Systems, Inc., ("Fiserv"). CSI and Fiserv each owned
a 50% interest in the JV. The JV was engaged in the business of marketing Year
2000 computer consulting services using computer software exclusively licensed
to CSI.
As funding for the JV, Fiserv agreed to provide a credit facility of up to
$5 million with interest payable monthly on the outstanding balance at a rate
of the prime rate plus 2%. A security interest in the JV's assets was granted
to Fiserv as security for payment of the obligations. All funds advanced to
the JV were provided under this agreement. In addition, the JV agreed to
provide monthly advances to CSI in the amount of $40,000 with a limit of
$720,000. No stated interest was due on those advances pursuant to the
agreement. During the period from April 1996 to August 1996, Fiserv provided a
total of $695,000 in funding to the JV, $560,000 of which the JV advanced to
CSI under the terms of the agreements described above.
As part of the CSI recapitalization, Fiserv agreed to sell its interest in
the JV to ZMAX. Effective September 1, 1996, NewDominion Capital Group, Inc.
("NewDominion") acquired Fiserv's interest in the JV. At this time, all
employees and operations of the JV were transferred to CSI. NewDominion's
intent was to serve as an intermediary in order to assign the joint venture
interest to ZMAX concurrent with the recapitalization of CSI. Fiserv's
interest was assigned to NewDominion for cash consideration of $310,000 and a
promissory note of $385,000. NewDominion granted a security interest to Fiserv
of its rights and interest in the JV as security for the $385,000 note. In
addition to the above consideration, Fiserv was pledged 3% of the outstanding
shares of the anticipated successor entity to the JV.
On September 20, 1996, NewDominion assigned its interest in the JV to ZMAX.
As consideration for the assignment, ZMAX assumed all liabilities, interests,
and obligations of NewDominion related to the JV including the $310,000
payable to Fiserv and the $385,000 promissory note. As the successor entity
(as described above), ZMAX assumed the obligation to issue a 3% ownership
interest in ZMAX to Fiserv.
This transaction has been, accounted for as a purchase by ZMAX. ZMAX
acquired the 50% interest in the JV for repayment of the amounts advanced by
Fiserv to the JV totaling $695,000 ($310,000 in cash and $385,000 note
payable) and 234,365 shares of ZMAX common stock with a fair value of
$1,373,379 based upon the quoted market price of ZMAX common stock. The
234,365 shares of common stock were not issued until April 1997 and have been
reflected as issuable as of December 31, 1996. The fair value of these shares
is included in stockholders' equity in the accompanying financial statements
as of December 31, 1996.
The purchase price has been allocated to assets and liabilities based on
their estimated fair values at the date of acquisition on a preliminary basis
as follows.
<TABLE>
<S> <C>
Intangible assets................................................. 2,590,263
Deferred income tax liability..................................... (521,884)
---------
2,068,379
</TABLE>
As of September 1, 1996, all operations, some of which had previously been
performed by the JV, were carried out by CSI. After the CSI transaction, ZMAX
transferred all of its interest in the JV to CSI as of January 1, 1997, and,
CSI as the sole remaining venture partner, terminated the JV.
F-11
<PAGE>
ZMAX CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CSI
On July 16, 1996, PRCC, Inc. ("PRCC") entered into an agreement with CSI to
acquire all of the outstanding stock of CSI. On September 20, 1996, PRCC
assigned its rights under the July 16, 1996 agreement with CSI to ZMAX in
return for $20,000 in cash and the right to purchase 350,000 shares of ZMAX
common stock for $0.30 per share. The $20,000 and fair value of, based upon
the quoted market price of the ZMAX common stock, of these shares has been
charged to expense as a cost of the CSI transaction and is included in other
expenses in the accompanying financial statements for the year ended December
31, 1996. These shares were not issued until April 1997 and have been
reflected as issuable as of December 31, 1996. The fair value of these shares
is included in stockholders' equity in the accompanying financial statements
as of December 31, 1996. Similarly, the subscription proceeds were not
received until May 1997, and have been reflected as stock subscriptions
receivable as of December 31, 1996.
Concurrent with this assignment, on September 20, 1996, ZMAX made an offer
to purchase all of the outstanding shares of CSI stock. The offer was accepted
by the stockholders of CSI and the agreement was announced to the public on
September 26, 1996. The September 20, 1996, agreement also provided that ZMAX
would advance amounts to CSI to fund their operations, CSI would enter into
employment agreements with certain executives who were the former stockholders
of CSI that provide for compensation at specified levels, and the former
stockholders of CSI were provided with certain anti-dilution protection with
respect to their future ownership interest in ZMAX provided that certain
performance criteria were met. These performance criteria were not
subsequently met and the former CSI stockholders are not entitled to the anti-
dilution protection prescribed in the agreement.
During the period from September 20, 1996 to November 6, 1996, ZMAX advanced
a total of $390,000 to CSI under two promissory notes totaling $200,000 and
under a line of credit agreement totaling $190,000. The stockholders of CSI
assigned a security interest in their CSI stock to ZMAX as consideration for
these advances.
On November 6, 1996, the Stock Purchase Agreement between CSI and ZMAX was
executed and the transaction was consummated. In return for all of the
outstanding stock of CSI, ZMAX issued 3,200,000 shares of common stock. At
closing, the former stockholders of CSI received 400,000 shares of ZMAX stock.
The remaining 2,800,000 shares (the "Escrowed Stock") were placed in escrow
subject to quarterly release based upon the cash flow (as defined) of CSI.
Under the terms of the Stock Purchase Agreement one share of Earn Out Stock
will be released for every $1.25 of cash flow generated. The stockholders are
entitled to vote the shares of the Escrowed Stock as well as to receive their
respective pro rata share of any distributions or dividends. The Escrowed
Stock is subject to forfeiture under certain conditions (see Note 12).
This transaction has been accounted for as a recapitalization of CSI with
CSI as the acquirer (a reverse acquisition). The fair value of the Earn Out
Stock will be recognized as compensation expense in the period in which the
shares are earned and released from escrow.
In connection with the transaction described above, the Company incurred
$54,678 of direct costs that have been charged to expense. The Company also
agreed to issue 320,000 shares of the Company's common stock to a consultant
for services related to the CSI transaction and related financing. The fair
value, based upon the quoted market price of the ZMAX common stock, of 160,000
of these shares has been charged to expense as a cost of the transaction and
is included in other expenses in the accompanying financial statements for the
year ended December 31, 1996. The fair market value of the other 160,000
shares has been recognized as a deferred financing cost in the accompanying
financial statements for the year ended December 31, 1996 (See Note 7). The
shares granted to the investment advisor were not issued until April 1997, and
are reflected as issuable as of December 31, 1996. The fair value of these
shares is included in stockholders' equity in the accompanying financial
statements as of December 31, 1996.
F-12
<PAGE>
ZMAX CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. PROPERTY, PLANT, AND EQUIPMENT:
Property, plant, and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Furniture and fixtures............................ $17,989 $ 80,772
Equipment......................................... 3,155 94,280
Leasehold Improvements............................ -- 18,250
Less--Accumulated depreciation.................... (273) (6,394)
------- --------
Property and equipment, net of accumulated
depreciation..................................... $20,871 $186,908
======= ========
</TABLE>
6. INTANGIBLE ASSETS:
Intangible assets consist of purchased software rights and intangibles
acquired as a result of ZMAX's purchase of Fiserv's interest in the JV. The
software rights and other intangibles are being amortized over their estimated
useful lives of five years. Accumulated amortization totaled $193,261 and
$341,870 (unaudited) as of December 31, 1996 and March 31, 1997, respectively.
During 1996, CSI purchased the rights to three software tools for a total of
$1,010,000. The remaining obligation is due in $150,000 installments in April
1997, October 1997, and April 1998 (see Note 7) while this obligation called
for fixed payments, it did not bear interest. Accordingly, interest has been
imputed at 10% on this obligation.
Two of the licenses provide for the exclusive rights to use and modify the
software for a term of 20 years. The third license, for the Change of Century
Analysis and Conversion Tool ("COCACT"), provides for the exclusive rights to
use the software in North America for a term of ten years (the "North American
COCACT License").
On April 30, 1997, the Company entered into an agreement to purchase all
right, title and interest to COCACT (the "COCACT Purchase Agreement").
Conditions of the purchase included a software development and enhancement
project to bring COCACT to the required level of performance as specified in
the agreement. The purchase price for the COCACT software is $1,100,000, of
which $250,000 was paid in May 1997, plus 150,000 shares of common stock of
the Company issuable upon completion and testing of the COCACT enhancements.
The remaining installments of $283,333 each are due in September 1997, January
1998, and May 1998. The balance of the purchase price will be payable
contingent upon the completion of the software development and enhancement
project by September 30, 1997. Under the terms of the COCACT Purchase
Agreement, the Company may terminate the agreement if, among other things, the
enhancement project is not satisfactorily completed. Upon termination and
recision of the software sale, the Company has the right to return the
software and treat the $250,000 payment made in May 1997 as prepayment of the
license fees payable under the North American COCACT License.
As of April 30, 1997, $300,000 under the original North American COCACT
License remained unpaid, due in installments of $150,000 each in October 1997
and April 1998. Under the terms of the COCACT Purchase Agreement, ZMAX has the
right to terminate and cancel the North American COCACT License including the
obligation to pay any remaining license fees. In the event that ZMAX exercises
its right to cancel the COCACT Purchase Agreement, termination of the North
American COCACT License would be automatically rescinded, whereupon ZMAX's
right and obligations under the North American COCACT License would be
reinstated retroactively.
F-13
<PAGE>
ZMAX CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. DEBT AND DEFERRED FINANCING COSTS:
The following details the Company's debt obligations:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Promissory note payable to Fiserv, interest
payable annually at the prime rate plus 1% (9.5%
at December 31, 1996), due August 1998.......... $ 385,000 $ 385,000
Amounts due for the purchase of software rights,
interest imputed at 10%, due in installments of
$150,000 in April 1997, October 1997, and April
1998............................................ 408,487 278,911
Convertible notes, interest payable monthly at
8%, due in January and March 1997............... 1,508,592 2,100,000
Convertible exchangeable subordinated debentures,
interest payable semi-annually, at 8%, due in
December 1999................................... 5,500,000 5,500,000
----------- ----------
Total.......................................... 7,802,079 8,263,911
Less--Current portion............................ (1,774,222) (2,236,054)
----------- ----------
$ 6,027,857 $6,027,857
=========== ==========
</TABLE>
The following represents the future minimum maturities of the Company's
debt:
<TABLE>
<S> <C>
1997.............................................................. $2,365,630
1998.............................................................. 527,857
1999.............................................................. 5,500,000
----------
Total........................................................... $8,393,487
==========
</TABLE>
Promissory Note Payable
In September 1996, the Company assumed a $385,000 promissory note payable to
Fiserv as consideration for the purchase of a 50% interest in the JV. In May
1997, the $385,000 note payable and the related accrued interest of $20,776 as
of March 31, 1997, were settled by the Company by issuing 32,077 shares of
common stock.
Convertible Notes
In connection with the CSI recapitalization, from September 1996 to October
1996, the Company issued a total of $1,980,000 in convertible notes (the
"Notes"). After the date of the CSI transaction, the Company issued an
additional $120,000 in Notes. The Notes are convertible, at the option of the
holder, into a total of 1,600,000 shares of the Company's common stock. Of the
total, $600,000 of the Notes are convertible at a rate of one share per $1.00
of principal. The remaining $1,500,000 are convertible at a rate of one share
per $1.50 of principal. Principal of $1,350,000 is due on January 20, 1997,
and $750,000 due on March 20, 1997 after which the Notes were convertible. In
1997, all of the holders exercised their conversion rights and in March 1997,
the Board of Directors approved the conversion and in April 1997, the Notes
were converted into 1,600,000 shares of common stock.
On the respective dates of issuance of the Notes, the conversion price of
the Notes was less than the quoted market price of the common stock.
Accordingly, because the intrinsic value of this beneficial conversion feature
F-14
<PAGE>
ZMAX CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
exceeds the amount of the proceeds of the Notes, the entire $2,100,000 in
proceeds have been allocated to additional paid-in capital to recognize this
beneficial conversion feature. The discount on the Notes resulting from the
allocation of proceeds to the beneficial conversion feature is reflected as a
charge to interest expense and is being recognized over the period until the
Notes become convertible. A total of $1,508,592 in interest expense has been
recognized for the year ended December 31, 1996 related to the discount
resulting from the beneficial conversion feature.
Convertible Exchangeable Subordinated Debentures
On December 6, 1996, the Company issued $5,500,000 in convertible
exchangeable subordinated debentures (the "Debentures"). Prior to the maturity
date or redemption by the Company, a holder may convert the entire principal
balance of their Debenture into common stock. Upon conversion, the holder will
receive one share of stock for each $5.00 of principal amount of the
Debenture. The Company may redeem or prepay the Debentures provided that the
Company has offered to exchange the Debentures for the Company's common stock
and a warrant to purchase additional common stock and the Company has filed an
effective registration statement pursuant to the Securities Act of 1933, as
amended, pertaining to the exchange offer.
If the exchange offer is made on or before the six month anniversary of the
Debentures, each $5.00 of principal will be exchanged for one share of common
stock plus a warrant to purchase one share of common stock. If the exchange
offer is made after the six month anniversary of the debentures, each $5.00 of
principal will be exchanged for one and one-tenth (1.1) share of stock plus an
equivalent number of warrants.
Upon exchange, the holder will receive common stock plus, for each share of
common stock received, one warrant to purchase an additional share of ZMAX
common stock at $7.00 per share if exercised prior to the first anniversary of
the date of issuance of the warrant or at $8.00 per share if exercised prior
to the second anniversary of the date of issuance of the warrant. The warrants
expire on the second anniversary of the date of issuance.
On the date of issuance of the Debentures, the conversion price of the
Debentures was less than the quoted market price of the Company's common
stock. Accordingly, because the intrinsic value of this beneficial conversion
feature exceeds the amount of the proceeds of the Debentures, the entire
$5,500,000 in proceeds have been allocated to additional paid-in capital to
recognize this beneficial conversion feature. The discount resulting from the
allocation of proceeds to the beneficial conversion feature is reflected as a
charge to interest expense and has been recognized in December 1996 as the
Debentures are immediately convertible by the holders. A total of $5,500,000
in interest expense has been recognized for the year ended December 31, 1996
related to the discount resulting from the beneficial conversion feature.
Deferred Financing Costs
Deferred financing costs, which were incurred in connection with the
issuance of the Notes and the Debentures, are charged to expense as additional
interest expense over the life of the debt, using the interest method.
Amortization of the deferred financing costs totaled $185,767 for the year
ended December 31, 1996.
F-15
<PAGE>
ZMAX CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. INCOME TAXES:
No provision for income taxes has been recorded as a result of the operating
losses incurred by the Company. The components of the provision for income
taxes consist of the following.
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 13, 1995
(DATE OF INCEPTION) DECEMBER 31
TO DECEMBER 31, 1995. 1996
--------------------- -----------
<S> <C> <C>
Income tax benefit:
Current--
Federal................................ $ -- $ --
State.................................. -- --
===== =========
Deferred--
Federal................................ -- (468,323)
State.................................. -- (87,810)
Valuation Allowance.................... -- 538,737
===== =========
$ -- $ (17,396)
===== =========
</TABLE>
The benefit for income taxes results in effective rates which differ from
the Federal statutory rate as follows.
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 13, 1995
(DATE OF INCEPTION) TO DECEMBER 31,
DECEMBER 31, 1995. 1996
---------------------- ------------
<S> <C> <C>
Statutory Federal income tax rate...... -- % (35.0)%
Effect of graduated rates.............. -- 1.0
Effect of basis differences
attributable to purchase accounting... -- (0.2)
Net operating losses for which no tax
benefit is currently available........ -- 1.0
Other increases in valuation
allowance............................. -- 3.2
Nondeductible expenses................. -- 29.8
--- -----
-- % (0.2)%
=== =====
</TABLE>
The components of the net deferred tax assets (liabilities) were as follows
as of December 31, 1995 and 1996 (in thousands).
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1995 1996
---- ----------
<S> <C> <C>
Deferred tax assets:
Organization and start-up costs.......................... $-- $ 700,618
Net operating loss carryforwards......................... -- $ 566,350
Other.................................................... -- 114,000
---- ----------
Total deferred tax assets.............................. $-- $1,380,968
==== ==========
Deferred tax liabilities:
Basis differences attributable to purchase accounting.... -- (504,488)
Depreciation and amortization............................ -- (6,775)
---- ----------
Total deferred tax liabilities......................... -- (511,263)
Net deferred tax asset................................... -- 869,705
Less: Valuation allowance................................ -- (1,374,193)
---- ----------
$-- $ (504,488)
==== ==========
</TABLE>
F-16
<PAGE>
ZMAX CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has determined that its deferred tax assets did not satisfy the
recognition criteria set forth in SFAS No. 109, and, accordingly, established
a valuation allowance for 100 percent of the deferred tax assets.
As of December 31, 1996, the Company had net operating losses of
approximately $1,400,000 available for carryforward to offset future taxable
income. These carryforwards expire in years 2001 through 2011. Under the
provisions of the Tax Reform Act of 1986, when there has been a change in an
entity's ownership of 50 percent or greater, utilization of net operating loss
carryforwards may be limited. As a result of ZMAX's equity transactions
occurring through December 31, 1992 and the equity transactions in 1996
including the CSI acquisition, the Company's net operating losses will be
subject to such limitations and may not be available to offset future income
for taxes purposes.
9. COMMON STOCK AND PREFERRED STOCK:
Reverse Stock Split
Effective July 23, 1996, ZMAX effected a 1 for 80 reverse stock split. All
share amounts and per share amounts have been retroactively restated to
reflect this event.
OffShore Placement
In September 1996, ZMAX sold 2,800,000 shares at $.30 per share to offshore
investors (the "OffShore Placement"). The proceeds were used to repay existing
debt of ZMAX (see Note 11 for a discussion of related party transactions).
Stock Subject to Cancellation
By an agreement dated April 27, 1992, ZMAX acquired all of the outstanding
common stock of American Oil for 625,000 common shares of ZMAX's stock,
5,000,000 preferred shares of ZMAX's stock and sold an additional 88,266
common shares of the Company's stock for $7,062 in cash. The preferred shares
were never issued and American Oil has not undertaken any business or any
financial transaction other than the acquisition of certain mining rights and
American Oil's corporate status has been suspended by the State of Nevada and
this subsidiary has been abandoned by the Company.
In September 1995, ZMAX entered into stock cancellation agreements with
certain stockholders that provided for the cancellation of the aforementioned
shares of the Company's stock. As of December 31, 1996, these shares had not
been cancelled. In March 1997, 296,007 of these shares were cancelled. An
additional 479,801 shares are subject to cancellation but were not cancelled
as of March 31, 1997.
Due to a lack of documentation and proper signature guarantees, 167,301 of
the shares remain outstanding and have been reported as lost by the
stockholder. Assuming the stockholder will provide necessary documentation,
these lost certificates may be cancelled of record upon the Company's
agreement to indemnify the transfer agent and the reservation of an equal
number of shares against the possible presentation of a lost certificate by a
bona fide holder. In the event of presentation of a lost certificate for
transfer, the shares would be transferred to the presenting bona fide holder
from the shares reserved for this purpose. In such event, the Company may
pursue indemnification remedies against the former stockholder under a lost
stock indemnity agreement signed by the former stockholder in October 1996.
F-17
<PAGE>
ZMAX CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The remaining 312,500 shares subject to cancellation have been lost by
another stockholder. The Company has been unable to cancel these shares of
record due to the lack of proper documentation. The Company's attempts to
locate the stockholder to correct document deficiencies have been unsuccessful
and the Company has currently decided to abandon its efforts to do so. The
Company is currently considering obtaining a court order to cancel these
shares of record.
Reserved Shares
The Company has reserved 1,820,000 shares of Common Stock for issuance under
its stock incentive and option plans and executive bonus program (see Notes 10
and 12).
Preferred Stock
As of December 31, 1995 and 1996, there were no shares of Preferred Stock
issued and outstanding. If issued, holders of Series A Preferred Stock would
be entitled to convert each share of Series A Preferred Stock into fair shares
of Common Stock at the option of the holder. In all other respects, the voting
powers, preferences, limitations, restrictions and relative rights of the
Series A Preferred Stock are the same as those of the Common Stock.
10. STOCK OPTIONS AND STOCK-BASED COMPENSATION:
In October 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 is
effective for awards granted in 1996 and 1995. SFAS No. 123 defines a "fair
value based method" of accounting for stock-based compensation. Under the fair
value based method, compensation cost is measured at the grant date based on
the fair value of the award and is recognized over the service period. Prior
to issuance of SFAS No. 123, stock-based compensation was accounted for under
the "intrinsic value method" as defined by APB Opinion No. 25, "Accounting for
Stock Issued to Employees." Under the intrinsic value method, compensation is
the excess, if any, of the market price of the stock at grant date or other
measurement date over the amount an employee must pay to acquire the stock.
SFAS No. 123 allows an entity to continue to use the intrinsic value method.
However, entities electing the accounting in Opinion No. 25 must make pro
forma disclosures as if the fair value based method of accounting had been
applied. The Company applies APB Opinion No. 25 and the related
interpretations in accounting for its stock-based compensation.
Under the provisions of SFAS No. 123, transactions with other than employees
in which services are the consideration received for the issuance of equity
securities shall be accounted for based upon the fair value of the
consideration. The only options granted in 1996 were granted to a consultant
and were accounted for at fair value. Accordingly, no pro forma disclosures
are required for the year ended December 31, 1996.
ZMAX Options
Prior to the CSI recapitalization, ZMAX granted options to certain of its
officers and directors, some of which remain outstanding as of December 31,
1996. In September 1994, the Company granted 6,565 options to its officers and
directors. The options were contingent upon service to ZMAX as a director,
officer, employee or consultant to the Company. As a result of the termination
of service by these individuals, these options were canceled in 1996. In June
1995, the Company granted 14,940 additional options to officers and directors.
Such
F-18
<PAGE>
ZMAX CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
options were to survive the appointment of these individuals and expire in
September 1997. None of these individuals remain in service with the Company
and in 1996, 7,814 of these options were canceled. An additional 1,876 were
canceled in May 1997.
Non-Employee Options
In September 1996, ZMAX granted 200,000 options to a consultant at exercise
prices ranging from $5.00 to $15.00 under the terms of a one-year consulting
agreement. Under the terms of the agreement, the options vested ratably over
the term of the agreement. The Company has recorded approximately $300,000 of
compensation expense related to these options for the year ended December 31,
1996 based upon the fair value of the options on the date of grant and the
vesting period. In May 1997, the consulting agreement was amended such that
the consultant's options were canceled and the consultant was granted 60,000
shares of the Company's common stock for services performed from September
1996 to May 1997. The difference between the fair value of the shares to be
issued and the cumulative compensation expense recorded as of the date the
agreement was amended will be charged to expense in May 1997.
The following is a summary of ZMAX options granted prior to the CSI
recapitalization.
<TABLE>
<CAPTION>
NUMBER OPTION PRICE WEIGHTED AVERAGE
OF SHARES RANGE EXERCISE PRICE
--------- ------------ ----------------
<S> <C> <C> <C>
Outstanding, December 31, 1993: -- $ -- $ --
Granted........................... 6,565 40.00 40.00
------- ----------- ------
Outstanding, December 31, 1994: 6,565 40.00 40.00
Granted........................... 15,940 40.00 40.00
------- ----------- ------
Outstanding December 31, 1995....... 22,505 40.00 40.00
Granted........................... 200,000 $5.00-15.00 9.82
Canceled.......................... (14,379) 40.00 40.00
------- ----------- ------
Outstanding, December 31, 1996...... 208,126 $5.00-40.00 11.00
======= =========== ======
Exercisable, December 31, 1996...... 63,682 $5.00-15.00 13.67
</TABLE>
1997 Stock Incentive Plan
In May 1997, the Board of Directors adopted the 1997 Stock Incentive Plan
(the "Incentive Plan"), subject to the approval of the stockholders. The
purpose of this plan is to provide additional compensation to employees,
officers, directors and consultants of the Company or an affiliate. Under the
terms of the Incentive Plan, 1,700,000 shares of common stock have been
reserved for issuance as incentive awards under the plan. The number of shares
of common stock associated with any forfeited stock incentive will be added
back to the number of shares that can be issued under the Incentive Plan.
Awards under the Incentive Plan and their terms will be determined by a
committee (the "Committee") selected by the Board of Directors. The Incentive
Plan permits the Committee to make awards of a variety of equity-based
incentives (collectively, "Stock Incentives").
The Incentive Plan allows for the grant of incentive stock options and non-
qualified stock options. The exercise price of the options will be established
by the Committee. The exercise price of an incentive stock option may not be
less than the fair market value of the Common Stock on the date of the grant
(or less than 110% of
F-19
<PAGE>
ZMAX CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the fair market value if the participant controls more than 10% of the voting
power of the Company or a subsidiary). Non-qualified stock options may be made
exercisable at a price equal to, less than or more than the fair market value
of the Common Stock on the date that the option is awarded. The term of an
option will be specified in the applicable stock incentive agreement.
In addition to stock options, the Incentive Plan also makes provisions for
other Stock Incentives, including stock appreciation rights, stock awards,
phantom shares, performance unit appreciation rights and dividend equivalent
rights. These Stock Incentives will be subject to the terms prescribed by the
Committee in accordance with the provisions of the Incentive Plan. The Stock
Incentives are generally not transferable or assignable during a holder's
lifetime.
In April 1997, the Company granted 1,200,000 non-qualified stock options
under the Incentive Plan to certain officers and employees. These options have
an exercise price of $14.31, expire ten years after the date of grant, and
will become fully vested after seven years, vesting may be accelerated
provided that certain revenue targets are achieved.
1997 Directors Formula Stock Option Plan
In May 1997, the Board of Directors adopted the 1997 Directors Formula Stock
Option Plan (the "Director Plan"). The Board of Directors has reserved 120,000
shares of Common Stock for issuance pursuant to awards which may be made under
the Director Plan. The number of shares of Common Stock associated with any
forfeited options are added back to the number of shares that can be issued
under the Director Plan.
The awards under the Director Plan are determined by the express terms of
the Director Plan. The Director Plan will be administered by a committee (the
"Committee"), the members of which are appointed by the Board of Directors.
The Committee will consist of at least one or more members of the Board of
Directors who will not receive a grant of an option under the Director Plan
and who are not currently eligible to receive a grant of an option under the
Director Plan. The Committee will have the authority in its sole discretion to
interpret the Director Plan and to make all other determinations and to take
all other actions it deems necessary or advisable for the implementation and
administration of the Director Plan.
Generally, only nonemployee directors of the Company who do not perform
services for the Company are eligible to participate in the Director Plan. The
Director Plan provides for option grants upon a nonemployee director's initial
appointment after May 20, 1997 to the Board of Directors to purchase 12,000
shares of Common Stock. The nonemployee director will vest immediately in
8,000 shares of Common Stock and will vest in an additional 2,000 shares after
the completion of the first year of continued service and an additional 2,000
shares after the completion of the second year of continued service. Each
option granted pursuant to the Director Plan will be evidenced by an agreement
and will be subject to additional terms as set forth in the agreement. Options
become exercisable when vested and expire 10 years after the date of grant,
subject to such shorter period provided in the agreement.
On May 20, 1997, 36,000 stock options were issued under the terms of the
Director Plan to three eligible directors. The exercise price of these options
is $14.06. The vesting schedule and exercise period is in accordance with the
terms described above.
F-20
<PAGE>
ZMAX CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. RELATED PARTY TRANSACTIONS:
In connection with the recapitalization of CSI, a consultant to the Company
and/or his affiliate was issued 320,000 shares of the Company's stock for
services related to the CSI transaction and related financing. This individual
and/or his affiliate received approximately $563,000 in 1996 from ZMAX prior
to the CSI acquisition as satisfaction for amounts owed to this individual by
ZMAX prior to December 31, 1995. Proceeds from the Offshore Placement were
used to satisfy this obligation. This individual has been a consultant to ZMAX
since 1994. The Company continues to retain this individual as a consultant at
$10,000 per month. In connection with the recapitalization of CSI, $280,000 of
consulting fees owed to this individual were satisfied in 1996 by issuing
$280,000 of convertible notes. In addition to incurring $120,000 in consulting
fees during 1996, ZMAX reimbursed approximately $155,000 to this individual
for expenses incurred on behalf of ZMAX.
In connection with the assignment of NewDominion's interest in the JV to the
Company, the Company retained an affiliate of NewDominion as a consultant and
a director. The Company incurred approximately $28,000 in consulting expenses
in 1996 for services rendered.
The Company has engaged an affiliate of an officer/director to provide
accounting services to the Company under a consulting agreement with a monthly
fee of approximately $3,500. In 1996, the Company incurred approximately
$12,000 in consulting expenses for services rendered.
12. COMMITMENTS AND CONTINGENCIES:
Leases
The Company is party to a sub-lease commencing in 1996 for a four-year term
for space at its Germantown, Maryland headquarters. The remaining payments due
as a result of these obligations are as follows:
<TABLE>
<S> <C>
1997................................................................ $132,916
1998................................................................ 154,203
1999................................................................ 163,254
2000................................................................ 135,755
--------
Total............................................................. $586,128
========
</TABLE>
Employment and Consulting Agreements
CSI has entered into employment agreements with two executives who were the
former stockholders of CSI. The agreements provided for a base salary plus a
bonus based upon CSI's cash flow (as defined in the agreement). The term of
the agreements began in November 1996 and extend for a period of three years.
One of the former stockholders of CSI resigned from the Company in April
1997. Pursuant to the terms of his employment agreement with CSI and his
separation agreement with CSI, he is collecting severance from the Company in
the amount of $100,000 per year through November 1999. This individual will
still be entitled to receive his pro rata share of the Escrowed Stock as it is
released from escrow provided that he does not violate the non-compete, non-
solicitation, or proprietary information restrictions contained in his
employment agreement.
F-21
<PAGE>
ZMAX CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The other former stockholder of CSI remains an officer and director of the
Company. In May 1997, his employment agreement was amended effective January
1, 1997. Under the terms of this agreement this employee will receive a base
salary plus bonus of up to 100% of his base salary, if the Company reaches
certain specified levels of revenue and profitability. If the bonus is earned
in 1997 it will be payable in 25% cash and 75% common stock. The number of
shares to be issued will be based upon the fair market value of the Company's
common stock at the end of the fiscal year. For fiscal years 1998 and 1999,
the Compensation Committee of the Company will set new performance criteria
and establish the percentage of the bonus to be paid in cash or options for
that year.
In the event that the employment agreement is terminated by the death or
permanent disability (as defined in the agreement) of the executive or by the
Company without cause (as defined in the agreement), severance payments at an
annual rate of $100,000 for the remaining term of the agreement will be due to
the executive or the executive's estate. The executive is subject to certain
noncompete and nonsolicitation provisions for a period of two years after
termination of the agreement.
In order to ensure that CSI had adequate funds to pay the compensation of
the executives under the original employment agreements, the Company placed
$200,000 in escrow. Each month beginning in December 1996, $16,667 will be
released from escrow to the operating account of CSI. Accordingly, as of
December 31, 1996, $184,016 represents restricted cash and is included in the
cash balance.
In June 1997, the Company entered into a three year employment agreement
with its Senior Vice-President--Technology. Under the terms of this agreement
this employee will receive an annual base salary plus a bonus. For fiscal
years 1997, 1998 and 1999 the employee is eligible to receive a bonus of up to
100% of his base salary, if the Company reaches certain specified levels of
financial performance. If the bonus is earned in 1997 it will be payable in
50% cash and 50% stock. For fiscal years 1998 and 1999, the Compensation
Committee of the Company will set new performance criteria and establish the
percentage of the bonus to be paid in cash or options for that year.
In April 1997, the Company entered into a three year consulting agreement
with the Chairman of the Board of Directors. Under the terms of this agreement
the consultant will be compensated at $20,000 per month. This agreement can be
terminated by the Company at any time; however, if the consultant is
terminated without cause, the Company is required to continue to pay the
consultant for the shorter of one year or the remaining term of the agreement.
The agreement also contains noncompete and nonsolicitation provisions
extending from the commencement of the agreement until two years after the
termination of the agreement.
Stockholders' Agreement
The former stockholders of CSI entered into a stockholders' agreement with
the Company. Under this agreement, the stockholders may not sell, pledge,
encumber, give, bequeath, or otherwise transfer or dispose of the stock
without complying with the terms of the agreements or obtaining the prior
written consent of the Company. A stockholder who receives a qualified offer
(as defined in the agreement) must notify the Company of the offer and the
Company has an option to elect to purchase the stock under the terms contained
in the qualified offer. The stockholders are not required to comply with the
provisions described above in order to effect a sale or disposition of their
stock made in compliance with Securities and Exchange Commission Rule 144.
The stockholders have also entered into employment agreements with CSI as
described above. If the employment of either of the stockholders is terminated
for cause (as defined) or if following the termination of the employment
agreement, the stockholder is determined to have breached any covenants or
restrictions in the
F-22
<PAGE>
ZMAX CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
employment agreements, the stockholder will offer to sell all of his stock to
the Company. The Company will have an option to elect to purchase the stock at
its then current value price (as defined). If the employment of either of the
stockholders is terminated for a reason other than for cause, excluding
expiration of the employment agreement by its terms, or if the employee
becomes permanently disabled, the stockholder will offer its stock for sale to
the corporation at a price designated by the offering stockholder and the
corporation will have an option to elect to purchase the stock at the offer
price or, if the offering stockholder does not designate a price, the then
current value price (as defined).
In the event that a stockholder dies, the Company will have the option to
purchase and the stockholder's estate will be required to sell all of the
stock at the current value price (as defined). Any Escrowed Stock subsequently
received by a stockholder's estate will be subject to this provision at the
time of earn out.
Under the terms of the stockholders' agreements, the stock may only be
offered for sale, sold or transferred pursuant to an effective registration
under the Securities Act of 1933 or an exemption therefrom. The term of this
restriction is for three years from the date of the agreement, November 6,
1996. The restrictions apply to any additional shares of stock acquired after
the execution of the stockholders' agreement.
Litigation
On April 17, 1997, Alan L. Levine and Canadian American Petroleum
Corporation filed suit in the Third Judicial District Court of Sale Lake
County, Utah against Zmax Corporation, f/k/a Mediterranean Oil Corporation,
f/k/a Oryx Gold Corporation, f/k/a Pandora, Inc. and John Does. The lawsuit
consists of three claims for relief against all of the defendants: civil
conspiracy; wrongful use of civil proceedings; and abuse of process. The
lawsuit seeks unspecified consequential and punitive damages arising from the
alleged delay in the issuance of shares of Common Stock of Pandora, Inc. The
plaintiffs allege that they currently own approximately 64,000 shares of
stock. The lawsuit is currently in the investigative stage. Given the
preliminary stage of this proceeding, the Company has not been able to assess
the relative materiality, or lack, thereof, of the plaintiff's claims. The
Company intends to vigorously defend itself against this action.
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.
F-23
<PAGE>
AUDITORS' REPORT
To the Shareholders,
Mediterranean Oil Corporation
(formerly Oryx Gold Corporation)
We have audited the balance sheets of Mediterranean Oil Corporation (formerly
Oryx Gold Corporation) as at December 31, 1994 and 1995 and the statements of
operations, stockholders' equity and cash flows for the years ended December
31, 1993, 1994 and 1995. These financial statements are the responsibility of
the company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the company as at December 31, 1994 and
1995 and the results of its operations and cash flows for the years ended
December 31, 1993, 1994 and 1995 in accordance with generally accepted
accounting principles in the United States.
The financial statements as at December 31, 1991 and for the period from
inception, April 24, 1986 to December 31, 1991 were audited by other auditors
who expressed an opinion without reservation on those statements in their
report dated March 12, 1992.
Amisano Hanson
Chartered Accountants
Vancouver, B.C.
March 28, 1996, except as to Note 8 which is as of
October 15, 1996
Comments by Auditors for U.S. Readers on Canada - U.S. Reporting Conflict
- -------------------------------------------------------------------------
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) when there is
substantial doubt about a company's ability to continue as a going concern.
The accompanying financial statements have been prepared on the basis of
accounting principles applicable to a going concern which assumes the
realization of assets and discharge of liabilities in the normal course of
business. As discussed in Note 1 to the accompanying financial statements and
in respect of the company's substantial losses from operations, substantial
doubt about the company's ability to continue as a going concern exists. The
accompanying financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Our report to the shareholders dated March 28, 1996 is expressed in
accordance with Canadian reporting standards which do not permit a reference
to such uncertainty in the auditors' report when the uncertainty is adequately
disclosed in the financial statements.
Amisano Hanson
Chartered Accountants
Vancouver, B.C.
March 28, 1996, except as to Note 8 which is as of
October 15, 1996
F-24
<PAGE>
MEDITERRANEAN OIL CORPORATION
(FORMERLY ORYX GOLD CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
ASSETS -------- ----------
<S> <C> <C>
Current assets:
Cash................................................... $ -- $ --
Total Assets........................................... $ -- $ --
-------- ----------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable--Note 5............................... $101,013 $ 508,160
Loans payable--Notes 4 and 8........................... 509,889 911,860
-------- ----------
Total current liabilities.............................. 610,902 1,420,020
-------- ----------
STOCKHOLDERS' EQUITY (DEFICIENCY)
Preferred stock $0.001 par value, 10,000,000 shares au-
thorized, none issued and outstanding................... -- --
Common stock $0.001 par value,
Authorized:
95,000,000 shares;
80,000,000 (1994 - 77,000,000) shares issued and out-
standing............................................ 77,000 80,000
Additional paid-in capital............................... 82,012 229,012
Deficit accumulated during the development stage......... (769,914) (1,729,032)
-------- ----------
Total stockholders' equity (deficiency)................ (610,902) (1,420,020)
-------- ----------
Total liabilities and stockholders' equity (deficien-
cy)................................................... $ -- $ --
-------- ----------
</TABLE>
F-25
<PAGE>
MEDITERRANEAN OIL CORPORATION
(FORMERLY ORYX GOLD CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
APRIL 24,
1986
(DATE OF
INCEPTION)
YEAR ENDED DECEMBER 31, TO
------------------------------------- DECEMBER
1993 1994 1995 31, 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Expenses
General and administra-
tive--Note 7............. $ 57,141 $ 139,026 $ 950,141 $ 1,316,051
Amortization.............. -- -- -- 350
Resource property costs... 167,328 -- -- 276,844
Advances written-off...... 3,670 300 8,977 47,287
Investment written-off--
Note 3................... -- -- -- 50,000
Finders fee............... -- -- -- 38,500
----------- ----------- ----------- -----------
Net loss.................. $ (228,139) $ (139,326) $ (959,118) $(1,729,032)
----------- ----------- ----------- -----------
Net loss per share........ $ (0.00) $ (0.00) $ (0.01) $ (0.05)
----------- ----------- ----------- -----------
Weighted average shares
outstanding.............. 77,000,000 77,000,000 77,750,000 36,343,062
----------- ----------- ----------- -----------
</TABLE>
F-26
<PAGE>
MEDITERRANEAN OIL CORPORATION (FORMERLY ORYX GOLD CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
COMMON STOCK ADDITIONAL DURING THE
------------------- PAID-IN DEVELOPMENT
SHARES AMOUNT CAPITAL STAGE TOTAL
---------- ------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
April 24, 1986 (Date of
Inception)............. -- -- -- -- --
Issuance of shares for
cash and services,
May 5, 1986, for
$.0018 per share...... 1,360,000 $ 1,360 $ 1,140 $ -- $ 2,500
Issuance of shares for
legal services on
May 5, 1986 for $.0000
per share............. 140,000 140 (140) -- --
Public offering-500,000
shares at $.1000 per
share................. 500,000 500 49,500 -- 50,000
Cost of public
offering.............. -- -- (11,000) -- (11,000)
Net loss, 1986......... -- -- -- -- --
---------- ------- -------- ------------ -----------
Balance, December 31,
1986................... 2,000,000 2,000 39,500 -- 41,500
Issuance of shares to
insiders for cash and
services performed on
June 4, 1987 for
$.0000 per share...... 11,619,048 11,619 (11,619) -- --
Issuance of shares for
services performed on
July 20, 1987 for
$.0000 per share...... 714,285 714 (714) -- --
Capital contributed by
shareholders.......... -- -- 3,461 -- 3,461
Net loss, 1987......... -- -- -- (43,829) (43,829)
---------- ------- -------- ------------ -----------
Balance, December 31,
1987................... 14,333,333 14,333 30,628 (43,829) 1,132
Capital contributed by
shareholders.......... -- -- 27,883 -- 27,883
Net loss, 1988......... -- -- -- (28,776) (28,776)
---------- ------- -------- ------------ -----------
Balance, December 31,
1988................... 14,333,333 14,333 58,511 (72,605) 239
Capital contributed by
shareholders.......... -- -- 5,442 -- 5,442
Net loss, 1989......... -- -- -- (5,512) (5,512)
---------- ------- -------- ------------ -----------
Balance, December 31,
1989................... 14,333,333 14,333 63,953 (78,117) 169
Capital contributed by
shareholders.......... -- -- 17,811 -- 17,811
Net loss, 1990......... -- -- -- (17,881) (17,881)
---------- ------- -------- ------------ -----------
Balance, December 31,
1990................... 14,333,333 14,333 81,764 (95,998) 99
Capital contributed by
shareholders.......... 4,000,000 4,000 (147) -- 3,853
Shares contributed back
to Company and
cancelled............. (394,642) (395) 395 -- --
Net loss, 1991......... -- -- -- (3,923) (3,923)
---------- ------- -------- ------------ -----------
Balance, December 31,
1991................... 17,938,691 17,938 82,012 (99,921) 29
Shares issued to
acquire American Oil
and Gas Corporation... 50,000,000 50,000 -- -- 50,000
Sale of shares for
cash.................. 7,061,309 7,062 -- -- 7,062
Sale of shares for
cash.................. 2,000,000 2,000 -- -- 2,000
Net loss, 1992......... -- -- -- (302,528) (302,528)
---------- ------- -------- ------------ -----------
Balance, December 31,
1992................... 77,000,000 77,000 82,012 (402,449) (243,437)
Net loss, 1993......... -- -- -- (228,139) (228,139)
---------- ------- -------- ------------ -----------
Balance, December 31,
1993................... 77,000,000 77,000 82,012 (630,588) (471,576)
Net loss, 1994......... -- -- -- (139,326) (139,326)
---------- ------- -------- ------------ -----------
Balance, December 31,
1994................... 77,000,000 77,000 82,012 (769,914) (610,902)
Sale of shares for
cash.................. 3,000,000 3,000 147,000 -- 150,000
Net loss, 1995......... -- -- -- (959,118) (959,118)
---------- ------- -------- ------------ -----------
Balance, December 31,
1995................... 80,000,000 $80,000 $229,012 $ (1,729,032) $(1,420,020)
---------- ------- -------- ------------ -----------
</TABLE>
F-27
<PAGE>
MEDITERRANEAN OIL CORPORATION
(FORMERLY ORYX GOLD CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
APRIL 24,
1986
(DATE OF
INCEPTION)
YEAR ENDED DECEMBER 31, TO
------------------------------- DECEMBER
1993 1994 1995 31, 1995
--------- --------- --------- -----------
<S> <C> <C> <C> <C>
Cash flow from operating activi-
ties:
Net loss........................ $(228,139) $(139,326) $(959,118) $(1,729,032)
Adjustments to reconcile loss to
net
Cash used in operations
Amortization of Organization... -- -- -- 350
Investment written-off......... -- -- -- 50,000
Change in non-cash items related
to operations:
Accounts payable 2,569 98,444 407,147 508,160
--------- --------- --------- -----------
Net cash used in operating activ-
ities........................... (225,570) (40,882) (551,971) (1,170,522)
--------- --------- --------- -----------
Cash flows used in investing ac-
tivities
Increase in investment.......... -- -- -- (50,000)
--------- --------- --------- -----------
Cash flows from financing activi-
ties:
Loan payable.................... 216,989 40,671 401,971 911,860
Increase in additional paid in
capital proceeds from sale of
common stock................... -- -- 147,000 201,645
--public offering.............. -- -- 3,000 53,000
--insiders..................... -- -- -- 15,017
Issued for investment............ -- -- -- 50,000
Cost of public offering.......... -- -- -- (11,000)
--------- --------- --------- -----------
Net cash provided by financing
activities...................... 216,989 40,671 551,971 1,220,522
--------- --------- --------- -----------
Net decrease in cash............. (8,581) (211) -- --
Cash, beginning of year.......... 8,792 211 -- --
--------- --------- --------- -----------
Cash, end of year................ $ 211 $ -- $ -- $ --
--------- --------- --------- -----------
Supplemental Cash Flows Informa-
tion
Cash paid for:
Interest....................... $ -- $ -- $ -- $ --
Taxes.......................... $ -- $ -- $ -- $ --
</TABLE>
F-28
<PAGE>
MEDITERRANEAN OIL CORPORATION
(FORMERLY ORYX GOLD CORPORATION) (A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1991, 1992, 1993, 1994 AND 1995
(STATED IN U.S. DOLLARS)
1. NATURE AND CONTINUANCE OF OPERATIONS
Line of Business
The company currently is in the process of reviewing new business
opportunities.
These financial statements have been prepared on a going concern basis. The
company has a working capital deficiency of $1,420,020 as at December 31,
1995. The company's ability to continue as a going concern is dependent on the
ability of the company to generate profitable operations in the future and/or
to obtain the necessary financing to meet its obligations and repay its
liabilities arising from normal business operations when they come due.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
The company was incorporated on April 24, 1986 under the laws of the state
of Nevada, U.S.A. under the name Pandora, Inc. On May 4, 1992, the company
changed its name to Oryx Gold Corporation. On November 2, 1995, the company
changed its name to Mediterranean Oil Corporation.
Development Stage Company
The company is a development stage company as defined in Statement of
Financial Accounting Standards No. 7. The company is devoting substantially
all of its present efforts to establish a new business and none of its planned
principal operations have commenced. All losses accumulated since inception
have been considered as part of the company's development stage activities.
Income Taxes
The company used the liability method of accounting for income taxes
pursuant to Statement of Financial Accounting Standards, No. 109 "Accounting
for Income Taxes."
Net Loss Per Share
Net loss per share is based on the weighted average number of common shares
outstanding during each period.
3. INVESTMENT
By an agreement dated April 27, 1992 the company acquired 100% of the shares
of American Oil and Gas Corporation (AOG) for 50,000,000 common shares of the
company, 5,000,000 preferred shares of the company for $5,000 and an
additional 7,061,309 common shares of the company for $7,061. Since April 2,
1992 the preferred shares were never issued and AOG has not undertaken any
business or any financial transactions and is a delinquent corporation. In
addition, on July 21, 1995 the company agreed to cancel the aforementioned
shares (50,000,000 common shares) in return for the assignment of the mining
claims originally held by AOG (At December 31, 1995 these shares had not been
cancelled). Consequently the investment in AOG was written-off.
4. LOANS PAYABLE (SEE NOTE 8)
Loans payable are unsecured, non-interest bearing and have no specific terms
for repayment.
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<PAGE>
MEDITERRANEAN OIL CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. RELATED PARTY TRANSACTIONS
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- --------
<S> <C> <C> <C>
During the year ended December 31, 1995 the company
incurred the following expenses to Directors and
Officers of the company:
Consulting........................................... $ -- $20,000 $ 47,416
Legal................................................ -- 33,297 152,998
Office............................................... -- -- 1,500
Salary............................................... -- -- 30,000
Directors' fees...................................... -- -- 33,677
------- ------- --------
$ -- $53,297 $265,591
------- ------- --------
</TABLE>
As at December 31, 1994 and 1995, accounts payable includes 30,955 and
$247,196, respectively, payable to Directors and Officers of the company.
6. INCOME TAXES
No provision for income taxes has been provided in 1993, 1994 and 1995 due
to the net loss. At December 31, 1995 the company has net operating loss
carryforwards, which expire commencing in the year 2004 totalling
approximately $1,700,000, the benefits of which have not been recorded.
Under the provisions of the Tax Reform Act of 1986, when there has been a
change in an entity's ownership of fifty percent or greater, utilization of
net operating loss carryforwards may be limited. As a result of equity
transactions occurring through December 31, 1992, the Company will be subject
to such limitation. The annual limitations have not been determined.
7. STOCK OPTIONS
As at December 31, 1995, the following Directors' stock options were
outstanding:
<TABLE>
<CAPTION>
EXERCISE
QUANTITY PRICE PER SHARE EXPIRY DATE
--------- --------------- ------------------
<S> <C> <C>
1,800,000 $0.50 September 27, 1997
</TABLE>
8. SUBSEQUENT EVENTS
(i) Subsequent to December 31, 1995, the company completed the consolidation
of its outstanding common shares on a basis of 1 new share for 80 old shares.
Upon completion of the consolidation, the company completed a private
placement and issued 2,800,000 post-consolidated shares at $0.30 per share for
$840,000. These funds were used as a payment on the Loans payable.
(ii) The company has indicated its intention to cancel 775,000 restricted
post-consolidated common shares at $0.08 par value (Note 3).
(iii) The company changed its name to ZMAX Corporation on August 9, 1996.
The company issued the following convertible notes payable:
. $480,000 note payable, interest at 8% per annum, convertible into 480,000
post-consolidated common shares at $1.00 per share
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<PAGE>
MEDITERRANEAN OIL CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
. $1,500,000 note payable, interest at 8% per annum convertible into
1,000,000 post-consolidated common shares at $1.50 per share
. The company will pay a 10% commission for the $1,500,000 funding ($90,000
paid subsequent to December 31, 1995)
Upon the receipt of a further $120,000, the company intends to issue a
further $120,000 note payable, interest at 8% per annum, convertible into
120,000 post-consolidated common shares at $1.00 per share.
(iv) By an offer to purchase agreement dated September 20, 1996, the company
acquired the right to purchase 100% of a private corporation involved in
software technology.
Consideration for this right consists of:
. $20,000 cash ($5,000 paid)
. An option to purchase a further 350,000 post-consolidated free trading
shares of the company at $0.30 per share. The option will expire after 35
months and may be exercisable at the rate of 10,000 shares per month,
commencing 60 days after the closing date.
By an offer to purchase agreement dated September 19, 1996, the company will
purchase 100% of the private corporation mentioned above.
Consideration for this acquisition will be:
. 3,200,000 post consolidated common shares of the company. 2,800,000 of
these post-consolidated shares will be earn-out shares, such that for
each share to be released, the private corporation must generate $1.25 of
cash flow. The balance of 400,000 post-consolidated common shares will be
exempt from registration.
The company will place at least $500,000 in trust no later than September
20, 1996 and an additional $500,000 by October 15, 1996. $310,000 (paid) will
be released directly to a party to the agreement and at least $50,000 (paid)
will be advanced to the private corporation on or before September 19, 1996.
The company will also provide additional operating funds of up to $4,000,000
to the private corporation.
(v) Subsequent to December 31, 1995, the company made the following
additional payments:
. $150,000 to the private corporation;
. $641,240 to pay down accounts payable; and
. $71,860 to pay off the remaining loans payable.
(vi) The company cancelled 500,000 pre-consolidated directors' stock options
as a result of directors' resignations and reserved a total of 500,000
post-consolidated common shares for share purchase options for directors,
officers, employees and consultants of the company under terms and
conditions to be established by the Board of Directors.
F-31
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger ("Merger Agreement") is made as of June
10, 1997, between ZMAX Corporation, a Nevada corporation ("Old ZMAX"), and New
ZMAX Corporation, a Delaware corporation ("New ZMAX"), collectively referred
to as the "Constituent Corporations", each with principal executive offices at
20251 Century Boulevard, Germantown, Maryland 20874.
A. Old ZMAX is a corporation duly organized and existing under the laws the
State of Nevada, with authorized capital stock of ninety-five million
(95,000,000) shares of Common Stock, $0.001 par value ("Old ZMAX Common
Stock") and ten million (10,000,000) shares of Preferred Stock, $0.001 par
value.
B. New ZMAX is a corporation duly organized and existing under the laws of
the State of Delaware, with authorized capital stock of fifty million
(50,000,000) shares of Common Stock, $0.001 par value ("New ZMAX Common
Stock"), and ten million (10,000,000) shares of Preferred Stock, $0.001 par
value.
C. The directors of the Constituent Corporations deem it advisable and to
the advantage of each Constituent Corporation that Old ZMAX merge into New
ZMAX on the terms and conditions provided herein ("the Merger").
Now, Therefore, the Constituent Corporations hereby adopt the plan of
reorganization encompassed by this Merger Agreement and agree that Old ZMAX
will merge into New ZMAX pursuant to the terms of this Merger Agreement.
1. Effective Time of Merger. Old ZMAX will be merged with and into New ZMAX,
which will be the surviving corporation effective at the earlier of the date
when this Merger Agreement is filed as part of the required Articles of Merger
with the Secretary of State of the State of Nevada or the date when a
Certificate of Ownership and Merger is filed with the Secretary of State of
the State of Delaware (the "Effective Time").
2. Succession; Rights and Liabilities of New ZMAX. At the Effective Time,
New ZMAX will succeed to all of the rights, privileges, powers, immunities and
franchises and all of the property, real, personal and mixed, of Old ZMAX,
without the necessity for any separate transfer. Thereafter, New ZMAX will be
responsible and liable for all liabilities and obligations of Old ZMAX, and
neither the rights of creditors nor any liens on the property of Old ZMAX will
be impaired by the Merger.
3. Common Stock and Preferred Stock of Old ZMAX and New ZMAX. At the
Effective Time, by virtue of the Merger and without any further action on the
part of the Constituent Corporations or their stockholders, (i) each share of
Old ZMAX Common Stock issued and outstanding immediately prior to the
Effective Time will be converted into and represent one fully paid and
nonassessable share of New ZMAX Common Stock, and (ii) each share of New ZMAX
Common Stock issued or outstanding immediately prior to the Effective Time
will be cancelled.
4. Exchange of Certificates. (a) After the Effective Time, each holder of an
outstanding certificate that immediately before the Effective Time represented
shares of Old ZMAX Common Stock to be exchanged for New ZMAX Common Stock
("Old ZMAX Certificate") will cease to have any right as a stockholder of Old
ZMAX. At that time, such holder's sole right will be to receive in exchange
for such holder's Old ZMAX Certificates, on surrender thereof to New ZMAX,
which will act as the exchange agent for Old ZMAX Certificates ("Exchange
Agent"), a certificate or certificates representing the number of whole shares
of New ZMAX that such holder is entitled to receive pursuant to the Merger.
(b) Notwithstanding any other provision of this Merger Agreement, until
holders or transferees have surrendered Old ZMAX Certificates to the
Exchange Agent, no dividends will be paid with respect to any shares of Old
ZMAX Common Stock represented by Old ZMAX Certificates. Such dividends, if
any, will be paid on surrender of Old ZMAX Certificates. Without regard to
when such Old ZMAX Certificates are surrendered for exchange as provided
herein, no interest will be paid on any dividends.
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<PAGE>
(c) As the Effective Time, New ZMAX will make available to the Exchange
Agent a sufficient number of certificates representing shares of New ZMAX
Common Stock required to effect the exchange discussed in 4(a) above.
5. Dissenting Stockholders. Notwithstanding the foregoing, any holder of Old
ZMAX Common Stock who dissents from the Merger and exercises appraisal rights
in accordance with the provisions of the Nevada law, and who perfects such
appraisal rights, will be entitled to receive only the value of such shares in
cash as determined pursuant to the applicable provisions of the Nevada Law.
6. Options and Warrants. On the Effective Time, New ZMAX will assume and
continue the stock options of Old ZMAX and any successor plan(s). The
outstanding and unexercised portions of all options to buy Old ZMAX Common
Stock will become options for the same number of shares of New ZMAX Common
Stock with no other changes in the terms and conditions of such options,
including exercise prices. The outstanding and unexercised portions of all
warrants to buy Old ZMAX Common Stock will become warrants for the same number
and type of shares of New ZMAX Common Stock with no other changes in the terms
and conditions of such warrants.
7. Acts, Plans, Policies, Etc. All corporate acts, plans, policies,
agreements, arrangements, approvals and authorizations of Old ZMAX, its
stockholders, Board of Directors and committees thereof, officers and agents
that were valid and effective immediately prior to the Effective Time, will be
taken for all purposes as the acts, plans, policies, agreements, arrangements,
approvals and authorizations of New ZMAX, and will be as effective and binding
thereon as the same were with respect to New ZMAX.
8. Certificate of Incorporation and Bylaws. The Certificate of Incorporation
of New ZMAX, as in effect immediately prior to the Effective Time, will be
amended and restated as of the Effective Time to read substantially as set
forth in Exhibit A to this Agreeemnt and, as so amended, will be the
Certificate of Incorporation of New ZMAX until thereafter amended as provided
by law. The Bylaws of New ZMAX, as in effect immediately prior to the
Effective Time, will be amended and restated as of the Effective Time to read
substantially as set forth in Exhibit B to this Agreement and, as so amended,
will be the Bylaws of New ZMAX until thereafter amended as provided by law.
9. Directors and Officers. At the Effective Time, the Board of Directors of
New ZMAX will consist of the members of the Board of Directors of Old ZMAX
immediately before the Merger and will continue to hold office as directors of
New ZMAX in such class and for such term as is described in the Proxy
Statement/Prospectus relating to the Merger. The individuals serving as
executive officers of Old ZMAX immediately before the Merger will serve as
executive officers of New ZMAX after the Effective Time.
10. Further Assurances. From time to time, and when required by New ZMAX or
its successors or assigns, the directors and officers of Old ZMAX will cause
execution and delivery on behalf of Old ZMAX of such deeds and other
instruments, and will take such actions or cause the taking of such actions),
as are necessary to vest, perfect or record in New ZMAX the title to and
possession of all the property, intents, assets, rights, privileges,
immunities, powers, franchises and authority of Old ZMAX, and otherwise to
carry out the purposes of this Merger Agreement.
11. Accounting. The Merger will be accounted for in accordance with
generally accepted accounting principles. As of the Effective Time, the assets
and liabilities of Old ZMAX will be taken up on the books of New ZMAX at the
amount at which each is carried on the books of Old ZMAX immediately before
the Effective Time.
12. Covenants and Agreements. From the date of this Merger Agreement until
the Effective Time or until abandonment or deferral of the Merger, each of the
Constituent Corporations will exercise all reasonable efforts to obtain
requisite consents and approvals to the Merger and to comply with all
instruments or agreements to which either corporation is a party or by which
either may be bound. The Board of Directors of Old ZMAX will cause all
necessary steps to be taken to (i) apply for listing of the shares of New ZMAX
Common Stock to be issued in the Merger on the Nasdaq SmallCap Market; (ii)
file with the Securities and Exchange Commission all
A-2
<PAGE>
documents required to complete the Merger; and (iii) present this Merger
Agreement for adoption or rejection by a vote of the holders of Old ZMAX
Common Stock at a meeting of the Stockholders called, at least in part, for
this purpose and recommend approval and adoption of this Merger Agreement by
the stockholders.
13. Amendment. This Merger Agreement may be amended at any time and in any
manner desired by the Boards of Directors of Old ZMAX and New ZMAX to clarify
the intention of the parties or effect or facilitate the purpose and intent of
this Merger Agreement; provided that none of the principal terms of this
Merger Agreement may be amended without the approval of the stockholders of
Old ZMAX.
14. Conditions. Unless waived by each of the parties hereto, the respective
obligation of each party to effect the Merger will be subject to the
fulfillment at or before the Effective Time of the following conditions:
(a) Old ZMAX will have obtained the approval of the holders of the
requisite number of shares of Old ZMAX Common Stock of this Merger
Agreement and the transactions contemplated hereby;
(b) A registration statement on an appropriate form pertaining to, inter
alia, the shares of New ZMAX Common Stock to be issued in the Merger will
have become effective in accordance with the provisions of the Securities
Act of 1933, as amended, and no stop order suspending such effectiveness
will have been issued and remain in effect;
(c) No preliminary or permanent injunction or other order or decree by
any federal or state court or regulatory body that prevents the
consummation of the Merger will have been issued and remain in effect (each
party agreeing to use its best efforts to have any such injunction, order
or decree lifted);
(d) The consummation of the transactions contemplated by the Merger
Agreement will not violate any statute, law, rule, ordinance, regulation,
judgment, decree, order, injunction, writ, permit or license of any court
or governmental authority applicable to Old ZMAX or New ZMAX or any of
their respective properties or assets, excluding such violations that would
not, in the aggregate, have a material adverse effect on the business,
operations, properties, assets, condition (financial or other), results of
operations or prospects of Old ZMAX and New ZMAX on a consolidates basis;
(e) The holders of at least 90% of the outstanding aggregate principal
amount of Old ZMAX 8% Convertible Exchangeable Debentures due 1999 (the
"Debentures") will have exchanged the Debentures for shares of Old ZMAX
Common Stock (the "Exchange") and Warrants that will be issued in the
Exchange will have been exercised for at least 968,000 shares of Old ZMAX
Common Stock and the exercise price therefor received by Old ZMAX; and
(f) The holders of less than 5% of the issued and outstanding shares of
Old ZMAX Common Stock will have submitted claims seeking to perfect
appraisal rights in accordance with the Nevada General Corporation Law.
15. Abandonment. At any time before the Effective Time and notwithstanding
the approval of this Merger Agreement by the stockholders of Old ZMAX, the
Board of Directors of Old ZMAX may terminate this Merger Agreement, abandon
the Merger, or defer consummation of the Merger for a reasonable period, if it
finds that such action would be in the best interest of the two corporations.
16. Governing Law. This Merger Agreement will be governed by and construed
in accordance with the laws of the State of Delaware.
[SIGNATURES ON FOLLOWING PAGE]
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<PAGE>
In Witness Whereof, each corporate party hereto has caused this Agreement and
Plan of Merger to be duly executed as of the date first-above written.
ZMAX Corporation, a Nevada New ZMAX Corporation, a Delaware
Corporation Corporation
By: /s/ Michael C. Higgins By: /s/ Michael C. Higgins
---------------------------------- ----------------------------------
Michael C. Higgins, President Michael C. Higgins, President
A-4
<PAGE>
ANNEX B
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
ZMAX CORPORATION (ORIGINALLY INCORPORATED AS NEW ZMAX CORPORATION)
PURSUANT TO (S) 245 AND (S) 103 OF THE GENERAL CORPORATION LAW OF THE STATE OF
DELAWARE
The undersigned, in order to amend and restate the Certificate of
Incorporation of New ZMAX Corporation in accordance with the General
Corporation Law of the State of Delaware, does hereby certify:
ARTICLE I. NAME
The name of the Corporation is ZMAX Corporation (the "Corporation"). The
Corporation filed an original Certificate of Incorporation of New ZMAX
Corporation with the Secretary of State of Delaware on May 30, 1997.
ARTICLE II. REGISTERED OFFICE
The address of the Corporation's registered office in the State of Delaware
is 1013 Centre Road, in the City of Wilmington, County of New Castle, 19805.
The name of its registered agent at such address is Corporation Service
Company.
ARTICLE III. PURPOSE
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of
the State of Delaware.
ARTICLE IV. CAPITAL STOCK
The aggregate number of shares of stock that the Corporation shall have
authority to issue is sixty million (60,000,000), of which ten million
(10,000,000) shares, with a par value of $0.001 per share, are designated as
Preferred Stock, and fifty million (50,000,000), with a par value of $0.001
per share, are designated as Common Stock.
(a) Provisions Relating to the Common Stock.
(1) Each holder of Common Stock is entitled to one vote for each share of
Common Stock standing in such holder's name on the records of the
Corporation on each matter submitted to a vote of the stockholders, except
as otherwise required by law.
(2) The holders of the Common Stock shall have no preemptive rights to
subscribe for any shares of any class of stock of the Corporation whether
now or hereafter authorized.
(b) Provisions Relating to the Preferred Stock. The authority of the Board
with respect to each series shall include, but not be limited to,
determination of the following:
(1) The number of shares constituting that series and the distinctive
designation of that series;
(2) The dividend rate on the shares of that series, whether dividends
shall be cumulative, and if so, from which date(s), and the relative rights
of priority, if any, of payment of dividends on shares of that series;
(3) Whether that series shall have voting rights, in addition to the
voting rights provided by law, and, if so, the terms of such voting rights;
(4) Whether that series shall have conversion privileges, and, if so, the
terms and conditions of such conversion, including provision for adjustment
of the conversion rate in such events as the Board of Directors shall
determine;
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<PAGE>
(5) Whether or not the shares of that series shall be redeemable, and, if
so, the terms and conditions of such redemption, including the date or date
upon or after which they shall be redeemable, and the amount per share
payable in case of redemption, which amount may vary under different
conditions and at different redemption dates;
(6) Whether that series shall have a sinking fund for the redemption or
purchase of shares of that series, and, if so, the terms and amount of such
sinking fund;
(7) The rights of the shares of that series in the event of voluntary or
involuntary liquidation, dissolution or winding up of the corporation, and
the relative rights of priority, if any, of payment of shares of that
series;
(8) Any other relative rights, preferences and limitations of that
series.
Dividends on outstanding shares of Preferred Stock shall be paid or declared
and set apart for payment before any dividends shall be paid or declared and
set apart for payment on the Common Stock with respect to the same dividend
period. If upon any voluntary or involuntary liquidation, dissolution or
winding up of the corporation, the assets available for distribution to
holders of shares of Preferred Stock of all series shall be insufficient to
pay such holders the full preferential amount to which they are entitled, then
such assets shall be distributed ratably among the shares of all series of
Preferred Stock in accordance with the respective preferential amounts
(including unpaid cumulative dividends, if any) payable with respect thereto.
ARTICLE V. BOARD OF DIRECTORS
(a) Number. The number of directors constituting the entire Board shall be
as fixed from time to time by vote of a majority of the entire Board,
provided, however, that the number of directors shall not be reduced so as to
shorten the term of any director at the time in office, and provided further,
that the number of directors constituting the entire Board shall be seven
until otherwise fixed by a majority of the entire Board.
(b) Election. The election of directors need not be by written ballot.
(c) Classified Board. The Board of Directors shall be divided into three
classes, as nearly equal in numbers as the then total number of directors
constituting the entire Board permits with the term of office of one class
expiring each year. At the first annual meeting of the stockholders, directors
of the first class will be elected to hold office for a term expiring at the
next succeeding annual meeting, directors of the second class will be elected
to hold office for a term expiring at the second succeeding annual meeting,
and directors of the third class will be elected to hold office for a term
expiring at the third succeeding annual meeting.
ARTICLE VI. BYLAWS
The Board of Directors is authorized to adopt, amend, or repeal bylaws for
the Corporation by a majority of the directors present at a meeting lawfully
convened.
ARTICLE VII. LIABILITY
To the full extent permitted by the General Corporation Law of the State of
Delaware or any of the applicable laws presently or hereafter in effect, no
director or officer of the Corporation will be personally liable to the
Corporation or its stockholders for or with respect to any acts or omissions
in the performance of his or her duties as a director or officer of the
Corporation. Any amendment or repeal of this Article VIII will not adversely
affect any right or protection of a director or officer of the Corporation
existing immediately prior to such amendment or repeal.
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<PAGE>
ARTICLE VIII. INDEMNIFICATION
(a) Right to Indemnification. Any person who was or is a party, or is
threatened to be made a party, to any threatened, pending, or completed
proceeding, whether civil, criminal, administrative, or investigative (whether
or not by or in the right of the Corporation) by reason of the fact that he is
or was a director of the Corporation (or is or was serving at the request of
the Corporation as a director, officer, employee or agent of another entity is
entitled to be indemnified by the Corporation) (the "Indemnitee") against
judgments, fines, penalties, excise taxes, amounts paid in settlement and
costs charges and expenses (including attorneys' fees and disbursements) that
he or she actually and reasonably incurs in connection with such proceeding to
the fullest extent permitted by the General Corporation Law of the State of
Delaware.
(b) Inurement. The right to indemnification shall inure whether or not the
claim asserted is based on matters that predate the adoption of this Article
VIII, will continue as to an Indemnitee who has ceased to hold the position by
virtue if which he or she was entitled to indemnification, and will inure to
the benefit of his or her heirs and personal representatives.
(c) Non-exclusivity of Rights. The right to indemnification and to the
advancement of expenses conferred by this Article IX are not exclusive of any
other rights that an Indemnitee may have or acquire under any statute, bylaw,
agreement, vote of stockholders or disinterested directors, this Certificate
of Incorporation or otherwise.
(d) Advancement of Expenses. The Corporation will, from time to time,
reimburse or advance to any Indemnitee the funds necessary for payment of
expenses, including attorneys' fees and disbursements, incurred in connection
with defending any proceeding for which he or she is indemnified by the
Corporation, in advance of the final disposition of such proceeding; provided
that, if then required by the Delaware General Corporation Law, the expenses
incurred by or on behalf of an Indemnitee may be paid in advance of the final
disposition of a proceedings only upon receipt by the Corporation of an
undertaking by or on behalf of such director or officer to repay any such
amount so advanced if it is ultimately determined by a final and unappealable
judicial decision that the Indemnitee is not entitled to be indemnified for
such expenses.
(e) Insurance. The Corporation may maintain insurance, at its expense, to
protect itself and any potential Indemnitee under this Article IX against any
loss, whether or not the Corporation would have the power to indemnify such
person against such loss under the General Corporation Law of the State of
Delaware.
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<PAGE>
ARTICLE IX. PROHIBITION OF ACTION BY WRITTEN CONSENT OF STOCKHOLDERS
Except as the Board of Directors may otherwise provide with respect to the
rights of Preferred Stockholders, any action that is required or permitted to
be taken by the stockholders of the Corporation at any annual or special
meeting of stockholders may be effected without a meeting only by the
unanimous written consent of stockholders.
This Amended and Restated Certificate of Incorporation has been duly adopted
by the Board of Directors and the stockholders of the Corporation in
accordance with the General Corporation Law of the State of Delaware.
In Witness Whereof, I have signed this Amended and Restated Certificate of
Incorporation of ZMAX Corporation this day of , 1997.
________________________________________________
Michael C. Higgins, President
B-4
<PAGE>
ANNEX C
AMENDED AND RESTATED BYLAWS
OF
NEW ZMAX CORPORATION
ARTICLE I
Stockholders
Section 1.1. Annual Meetings. An annual meeting of stockholders shall be
held for the election of directors on such date, and at such time and place,
either within or without the State of Delaware, as the Board of Directors may
from time to time designate within four months after the end of the fiscal
year of the Corporation. Any other proper business may be transacted at an
annual meeting. If the annual meeting is not held on the date designated, it
may be held as soon thereafter as convenient and shall be called the annual
meeting.
Section 1.2. Special Meetings. Special meetings of the stockholders, for any
purpose or purposes, unless otherwise prescribed by the General Corporation
Law of the State of Delaware, may be called by the President or the Board of
Directors. The President will call a special meeting of the stockholders at
the request of the holders of not less than twenty-five percent (25%) of all
the outstanding shares of the Corporation entitled to vote at the meeting.
Section 1.3. Notice of Meetings. Whenever stockholders are required or
permitted to take any action at a meeting, a written notice of the meeting
will be given that states the place, date and hour of the meeting and, in the
case of a special meeting, the purpose(s) for which the meeting is called.
Unless otherwise provided by law, the Certificate of Incorporation or these
Bylaws, the written notice of any meeting will be given not less than ten nor
more than sixty days before the date of the meeting to each stockholder
entitled to vote at such meeting. If mailed, such notice will be deemed to be
given when deposited in the United States mail, postage prepaid, directed to
the stockholder at his or her address as it appears in the records of the
Corporation.
Section 1.4. Waiver of Notice. A stockholder may waive notice of any
meeting; provided that a stockholder's attendance at meeting shall constitute
waiver of notice of such meeting, except when the stockholder attends a
meeting for the express purpose of objecting to the transaction of any
business to be transacted at the meeting, and not for the purpose of objecting
to the purpose of the meeting.
Section 1.5. Adjournments. Any meeting of stockholders, annual or special,
may adjourn from time to time to reconvene at the same or some other place,
and notice need not be given of any such adjourned meeting if the time and
place are announced at the meeting at which the adjournment is taken. At the
adjourned meeting, the Corporation may transact any business that might have
been transacted at the original meeting. If the adjournment is for more than
thirty days, or if after the adjournment a new record date is fixed for the
adjourned meeting, pursuant to Section 1.3, notice of the adjourned meeting
will be given to each stockholder of record entitled to vote at the meeting.
Section 1.6. Record Date.
(a) Determination of Record Date. For purposes of determining the number and
identity of stockholders for any purpose, the Board of Directors may fix a
date in advance as the record date for any such determination of stockholders,
provided that the record date may not precede the date of the resolution
fixing the record date. The record date may not be more than sixty days prior
to the date that the particular action requiring the determination of
stockholders is to occur. If to determine the stockholders entitled to notice
of, or to vote at, a meeting of stockholders, the record date may not be fewer
than ten days prior to the meeting. The record date for determining
stockholders for any other purpose shall be at the close of business on the
day on which the Board of Directors adopts the resolution relating thereto. A
determination of stockholders of record entitled to notice of, or to vote at,
a meeting of stockholders will apply to any adjournment of the meeting;
provided that the Board of Directors may fix a new record date for the
adjourned meeting.
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(b) Failure to Fix Record Date. If the stock transfer books are not closed
and no record date is fixed for the determination of stockholders entitled to
notice or to vote, or to receive payment of a dividend, the date on which the
notice is mailed or the Board of Directors resolution declaring the dividend
is adopted, as the case may be, will be the record date for such determination
of stockholders.
Section 1.7. List of Stockholders Entitled to Vote. At least ten days before
each meeting of stockholders, the officer or agent charged with overseeing the
stock transfer books of the Corporation will compile a complete list of the
stockholders entitled to vote at such meeting, or any adjournment thereof,
arranged in alphabetical order, with the address of and the number of shares
held by each. Such list will be kept on file at the Corporation's principal
office for the ten days before the meeting and will be subject to the
inspection of any stockholder during that ten-day period during normal
business hours for any purpose related to the meeting and during the meeting.
Section 1.8. Quorum. Except as otherwise provided by law, the Certificate of
Incorporation, or these Bylaws, a majority of the outstanding shares of the
Corporation entitled to vote, represented in person or by proxy, will
constitute a quorum at a meeting of stockholders. If less than a majority of
the outstanding shares are represented at a meeting, a majority of the shares
so represented may adjourn the meeting from time to time without further
notice. If a quorum is present or represented at such adjourned meeting, any
business may be transacted that might have been transacted at the meeting as
originally notified. The stockholders present at a duly organized meeting may
continue to transact business until adjournment, notwithstanding the
withdrawal of enough stockholders to leave less than a quorum.
Section 1.9. Voting.
(a) One Vote Per Share. Unless otherwise provided by the Certificate of
Incorporation or these Bylaws, each outstanding share entitled to vote will be
entitled to one vote on each matter submitted to a vote at a meeting of
stockholders.
(b) Required Vote. Unless the General Corporation Law of the State of
Delaware imposes a super-majority requirement with respect to a particular
matter brought before the stockholders, a majority vote of those shares
present and voting at a duly organized meeting will suffice to defeat or enact
any proposal; provided that with respect to votes to elect directors, a
plurality of the votes cast will be sufficient to elect.
(c) Shares Held By Other Than the Record Owner. Shares held by an
administrator, executor, guardian or conservator may be voted by him or her,
in person or by proxy, without the transfer of such shares into his or her
name. Shares held in the name of a trustee may be voted by him or her, in
person or by proxy, only if the shares are transferred into the trustee's
name. Shares held in the name of, by or under the control of a receiver may be
voted by the receiver without transferring the shares into the receiver's name
if authority to do so is evidenced in an order from the court that appointed
the receiver. A stockholder whose shares are pledged shall be entitled to vote
his or her shares until the shares are transferred into the name of the
pledgee, and thereafter, the pledgee will be entitled to vote the shares so
transferred. Shares belonging to the Corporation or held by it in a fiduciary
capacity may not be voted, directly or indirectly, at any meeting, and will
not be counted in determining the total number of outstanding shares at any
given time.
Section 1.10. Proxies.
(a) General. At all meetings of stockholders, a stockholder may vote by
proxy. Proxies must be written, signed by the stockholder or by his or her
duly authorized attorney-in-fact, and filed with the Secretary of the
Corporation before or at the time of a meeting where a proxy is granted. No
proxy is valid after six months from the date of its execution, unless
otherwise provided in the proxy or coupled with an interest.
(b) Irrevocable Proxies. A proxy may be irrevocable if it states that it is
irrevocable and if, and only as long as, it is coupled with an interest
sufficient in law to support an irrevocable power.
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(c) Revocation of a Proxy. A stockholder may revoke any proxy that is not
irrevocable by attending the meeting and voting in person or by filing an
instrument in writing revoking the proxy of by delivering a proxy in
accordance with applicable law bearing a later date to the Secretary of the
Corporation.
ARTICLE II
Board of Directors
Section 2.1. Number; Qualifications. The Board of Directors shall consist of
not less than three (3) or more than fifteen (15) members with the specific
number to be set from time to time by the affirmative vote of a majority of
the members of the Board of Directors. A director will hold office until the
next annual meeting of stockholders and until his or her successor is elected
and qualified. Directors need not be stockholders of the corporation.
Section 2.2. Election; Resignation; Vacancies. The Board of Directors will
initially consist of the persons named as director by the incorporator, and
each director so elected will hold office until the first annual meeting of
stockholders and until his or her successor is elected and qualified. At the
first annual meeting of stockholders, the stockholders will elect directors to
serve in all three classes of the Board of Directors as provided by the
Certificate of Incorporation. Thereafter, one class of directors will be
elected each year at either an annual or special meeting of the stockholders
to hold office for the period of time designated for that class. If there is
only one nominee for any directorship, it will be in order to move that the
Secretary cast the elective ballot to elect the nominee. A director may resign
at any time on written notice to the Corporation. Any vacancy occurring in the
Board of Directors, whether by reason of death, resignation, removal, or an
increase in the number of directors, may be filled by the affirmative vote of
the majority of the remaining directors, though less than a quorum of the
Board of Directors, or by election at an annual meeting or at a special
meeting of the stockholders called for that purpose. A director elected to
fill a vacancy will be elected for the unexpired term of his predecessor in
office.
Section 2.3. Regular Meetings. A regular meeting of the Board of Directors
for the election of officers and the transaction of any other business that
may properly come before the meeting shall be held immediately after, and at
the same place as, each annual meeting of stockholders, if a quorum of
directors is then present or as soon thereafter as may be convenient. Regular
meetings of the Board of Directors may be held at such places within or
without the State of Delaware and at such times as the Board of Directors may
from time to time determine. The Board of Directors may provide, by
resolution, the day, time and place for the holding of additional regular
meetings without other notice than such resolution.
Section 2.4. Special Meetings. Special meetings of the Board of Directors
may be called by or at the request of the President or any director. The
person(s) authorized to call special meetings of the Board of Directors may
fix any place, within or without the State of Delaware, to hold a special
meeting of the Board of Directors. Notice of a special meeting must be given
to each director by the person(s) calling the meeting at least two days before
the meeting.
Section 2.5. Waiver of Notice. A director may waive notice of any meeting. A
director's attendance at meeting shall constitute waiver of notice of such
meeting; provided that, when a director attends a meeting for the express
purpose of objecting to the transaction of any business to be transacted at
the meeting, and not for the purpose of objecting to the purpose of the
meeting, the director will not be deemed to have waived notice of such
meeting.
Section 2.6. Telephonic Meetings Permitted. Members of the Board of
Directors, or any committee designated by the Board of Directors, may
participate in a meeting thereof by means of telephone conference, or similar
communications equipment that permits all persons participating in the meeting
to hear each other, and participation in ameeting pursuant to this By-law will
constitute presence at such meeting.
Section 2.7. Quorum; Voted Required for Action. At all meetings of the Board
of Directors, a majority of the whole Board of Directors will constitute a
quorum for the transaction of business. Unless required by the
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General Corporation Law of the State of Delaware, the Certificate of
Incorporation or these Bylaws, the vote of a majority of the directors present
at a meeting at which a quorum is present will be the act of the Board of
Directors. If less than a majority is present at a meeting, a majority of the
directors present may adjourn the meeting from time to time without further
notice. Once a quorum has been established at a duly organized meeting, the
Board of Directors may continue to transact corporate business until
adjournment, notwithstanding the withdrawal of enough members to leave less
than a quorum.
Section 2.8. Payment of Expenses. By resolution of the Board of Directors,
directors may be paid their expenses, if any, of attendance at each meeting of
the Board of Directors. Directors may be paid also either a fixed sum for
attendance at each meeting of the Board of Directors or a stated salary as
director. Such payment will not preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor.
Section 2.9. Dissent to Corporate Action. A director who is present at a
meeting of the Board of Directors at which action on any corporate matter is
taken shall be presumed to have assented to the action taken unless he or she
(i) enters his or her dissent in the minutes of the meeting, (ii) files
written dissent to such action with the Secretary of the meeting before
adjournment, or (iii) expresses such dissent by written notice to the
Secretary of the Corporation within one (1) day after the adjournment of the
meeting. The right to dissent shall not apply to a director who voted in favor
of such action.
Section 2.10. Action by Written Consent. Any action required or permitted to
be taken at a meeting of the Board of Directors may be taken without a meeting
if all members of the Board of Directors sign a written consent with respect
to such action. Such consent shall be filed with the minutes of proceedings of
the Board of Directors.
ARTICLE III
Committees
Section 3.1. Committees. The Board of Directors may, be resolution passed by
a majority of the whole Board of Directors, designate one or more committees,
each to consist of one or more of the directors. The Board of Directors may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee. In
the absence or disqualification of a member of the committee, the member or
members thereof present at any meeting and not disqualified from voting,
whether or not constituting a quorum, may unanimously appoint another member
of the Board of Directors to act at the meeting in place of any such absent or
disqualified member. Any such committee, to the extent permitted by the
General Corporation Law of the State of Delaware and to the extent provided in
the resolution of the Board of Directors, will have and may exercise all the
powers and authority of the Board of Directors in the management of the
business and affairs of the Corporation, and may authorize the seal of the
Corporation to be affixed to all papers that may require it.
Section 3.2. Committee Rules. Unless the Board of Directors otherwise
provides, each committee designated by the Board of Directors may make, alter
and repeal rules for the conduct of its business. In the absence of such
rules, each committee will conduct its business in the same manner as the
Board of Directors conducts its business pursuant to Article II of these
Bylaws.
ARTICLE IV
Officers
Section 4.1. Officers. The officers of the Corporation are President, Vice
President, Secretary, and Treasurer. Other officers and assistant officers may
be authorized and elected or appointed by the Board of Directors. An
individual is permitted to hold more than one office.
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Section 4.2. Election. The officers of the Corporation will be elected
annually by the Board of Directors at the first meeting of the Board of
Directors held after each annual meeting of the stockholders. If the election
of officers is not held at such meeting, it will be held as soon thereafter as
convenient. Each officer will hold office until his or her successor is duly
elected and qualified, or until his or her death, resignation or removal.
Section 4.3. Removal. Any officer, elected or appointed, may be removed by
the Board of Directors, but such removal shall be without prejudice to the
contract rights, if any, of the person so removed.
Section 4.4. Vacancy. A vacancy in any office for any reason may be filled
by majority vote of the Board of Directors, and any officer so elected will
serve for the unexpired portion of the term of such office.
Section 4.5. President. The President presides at all meetings of the Board
of Directors and of the stockholders and has general charge and control over
the affairs of the Corporation subject to the Board of Directors. The
President signs or countersigns all certificates, contracts and other
instruments of the Corporation as authorized by the Board of Directors and
performs such other duties incident to the office or required by the Board of
Directors.
Section 4.6. Vice President. The Vice President exercises the functions of
the President in the President's absence, and has such powers and duties as
may be assigned to him or her from time to time by the Board of Directors.
Section 4.7. Secretary. The Secretary issues all required notices for
meetings of the Board of Directors and of the stockholders, keeps a record of
the minutes of the proceedings of the meetings of the Board of Directors and
of the stockholders, has charge of the Corporate Seal and the corporate books,
and makes such reports and performs such other duties as are incident to the
office or required by the Board of Directors.
Section 4.8. Treasurer. The Treasurer has custody of all monies and
securities of the Corporation, keeps regular books of account, disburses the
funds of the Corporation, renders account to the Board of Directors of all
transactions made on behalf of the Corporation and of the financial condition
of the Corporation from time to time as the Board requires, and performs all
duties incident to the office or properly required by the Board of Directors.
Section 4.9. Salaries. The salaries of all officers will be fixed by the
Board of Directors, and may be changed from time to time by a majority vote of
the Board of Directors.
ARTICLE V
Certificate of Shares
Section 5.1. Certificates. Certificates representing shares of the
Corporation will be in the form determined by the Board of Directors, and will
be signed by the Chairman of the Corporation or any officer, certifying the
number of shares owned by him or her in the Corporation. Any of or all the
signatures on the certificate may be a facsimile. If any officer, transfer
agent or registrar who has signed, or whose facsimile signature has been
placed upon, a certificate ceases to hold that position before the certificate
is issued, it may be issued by the Corporation with the same effect as if the
officer, transfer agent or registrar continued to hold that position at the
date of issue.
Section 5.2. Lost, Stolen or Destroyed Stock Certificates; Issuance of New
Certificates. If a certificate is lost, stolen or destroyed, a new one may be
issued on such terms and indemnity to the Corporation as the Board of
Directors may prescribe.
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ARTICLE VI
Indemnification of Directors and Officers
Section 6.1. Directors
(a) Right to Indemnification; Insurance. Every person who was or is a party
to, or is threatened to be made a party to, or is involved in any action, suit
or proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that he or she, or a person of whom he is the legal
representative, is or was a director, or is or was serving at the request of
the corporation as a director, officer, employee or agent of another
corporation, or as its representative in another enterprise (an "Indemnitee"),
will be indemnified and held harmless by the Corporation to the fullest extent
legally permissible under the laws of the State of Delaware against all
judgments, fines, penalties, excise taxes, amounts paid in settlement and
costs, charges and expenses (including attorneys' fees and disbursements)
actually and reasonably incurred or suffered by him or her in connection
therewith, subject to the standards of conduct, the procedures, and other
applicable provisions of the General Corporation Law of the State of Delaware.
Such right of indemnification is a contract right which may be enforced in any
manner desired by such person. The corporation may purchase and maintain
insurance on behalf of an Indemnitee against any liability arising out of such
status, whether or not the corporation would have the power to indemnify such
person.
(b) Inurement. The right to indemnification shall inure whether or not the
claim asserted is based on matters that predate the adoption of this Article
VIII, will continue as to an Indemnitee who has ceased to hold the position by
virtue of which he or she was entitled to indemnification, and will inure to
the benefit of his or her heirs and personal representatives.
(c) Non-exclusivity of Rights. The right to indemnification and to the
advancement of expenses conferred by this Section 6.1 are not exclusive of any
other rights that an Indemnitee may have or acquire under any statute, bylaw,
agreement, vote of stockholders or disinterested directors, this Certificate
of Incorporation or otherwise.
(d) Advancement of Expenses. The Corporation will, from time to time,
reimburse or advance to any Indemnitee the funds necessary for payment of
expenses, including attorneys' fees and disbursements, incurred in connection
with defending any proceeding for which he or she is indemnified by the
Corporation, in advance of the final disposition of such proceeding; provided
that, if then required by the General Corporation Law of the State of
Delaware, the expenses incurred by or on behalf of an Indemnitee may be paid
in advance of the final disposition of a proceedings only upon receipt by the
Corporation of an undertaking by or on behalf of such Indemnitee to repay any
such amount so advanced if it is ultimately determined by a final and
unappealable judicial decision that the Indemnitee is not entitled to be
indemnified for such expenses.
Section 6.2. Officers, Employees and Agents. The Board of Directors may, on
behalf of the Corporation, grant indemnification to any officer, employee,
agent or other individual to such extent and in such manner as the Board of
Directors in its sole discretion may from time to time and at any time
determine, in accordance with the General Corporation Law of the State of
Delaware.
ARTICLE VII
General Provisions
Section 7.1. Fiscal Year. The fiscal year of the Corporation will be fixed
by of the Board of Directors.
Section 7.2. Amendments. These Bylaws may be amended or repealed or new
Bylaws may be adopted (i) at any regular or special meeting of stockholders at
which a quorum is present or represented, by the vote of the holders of shares
entitled to vote in the election of any directors, provided notice of the
proposed alteration, amendment or repeal is contained in the notice of such
meeting; or (ii) by affirmative vote of a majority of the Board of Directors
at any regular or special meeting.
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Section 7.3. Books and Records; Examination. Any records maintained by the
corporation in the regular course of its business, including its stock ledger,
books of account, and minute books, may be kept on, or be in any form of
information storage, provided that the records can be converted into clearly
legible form within a reasonable time. The books and records of the
Corporation may be kept outside of the State of Delaware. Except as may
otherwise be provided by the General Corporation Law of the State of Delaware,
the Board of Directors will have the power to determine from time to time
whether and to what extent and at what times and places and under what
conditions any of the accounts, records and books of the Corporation are to be
open to the inspection of any stockholder.
Section 7.4. Dividends. Subject to the provisions, if any, of the General
Corporation Law of Delaware and the Certificate of Incorporation, dividends on
the capital shares of the Corporation may be declared by the Board of
Directors at any regular or special meeting. Dividends may be paid in cash, in
property or in shares of the capital stock. Before payment of any dividend,
the Board of Directors may set aside out of any funds of the Corporation
available for dividends such reserves for any purpose that the directors will
think conducive to the interests of the Corporation.
Section 7.5. Seal. The Corporation may or may not have a corporate seal, as
may from time to time be determined by resolution of the Board of Directors.
If a corporate seal is adopted, it will have inscribed thereon the name of the
corporation and the words "Corporate Seal" and "Delaware". The seal may be
used by causing it or a facsimile thereof to be impressed or affixed or in any
manner reproduced or by causing the word [SEAL], in brackets, to appear where
the seal is required to be impressed or affixed.
Section 7.6. Checks. All checks or demands for money and notes of the
Corporation will be signed by one or more officers of the Corporation as the
Board of Directors may from time to time designate.
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ANNEX D
NEVADA REVISED STATUTES
CHAPTER 92A
MERGERS AND EXCHANGES OF INTEREST
(ADDED BY CH. 586, L. '95, EFF. 10-1-95)
RIGHTS OF DISSENTING OWNERS
92A.300 Definitions.--As used in NRS 92A.300 to 92A.500, inclusive, unless
the context otherwise requires, the words and terms defined in NRS 92A.305 to
92A.335, inclusive, have the meanings ascribed to them in those sections.
92A.305 "Beneficial Stockholder" Defined.--"Beneficial stockholder" means a
person who is a beneficial owner of shares held in a voting trust or by a
nominee as the stockholder of record.
92A.310 "Corporate Action" Defined.--"Corporate action" means the action of
a domestic corporation.
92A.315 "Dissenter" Defined.--"Dissenter" means a stockholder who is
entitled to dissent from a domestic corporation's action under NRS 92A.380 and
who exercises that right when and in the manner required by NRS 92A.410 to
92A.480, inclusive.
92A.320 "Fair Value" Defined.--"Fair value," with respect to a dissenter's
shares, means the value of the shares immediately before the effectuation of
the corporate action to which he objects, excluding any appreciation or
depreciation in anticipation of the corporate action unless exclusion would be
inequitable.
92A.325 "Stockholder" Defined.--"Stockholder" means a stockholder of record
or a beneficial stockholder of a domestic corporation.
92A.330 "Stockholder of Record" Defined.--"Stockholder of record" means the
person in whose name shares are registered in the records of a domestic
corporation or the beneficial owner of shares to the extent of the rights
granted by a nominee's certificate on file with the domestic corporation.
92A.335 "Subject Corporation" Defined.--"Subject corporation" means the
domestic corporation which is the issuer of the shares held by a dissenter
before the corporate action creating the dissenter's rights becomes effective
or the surviving or acquiring entity of that issuer after the corporate action
becomes effective.
92A.340 Computation of Interest.--Interest payable pursuant to NRS 92A.300
to 92A.500, inclusive, must be computed from the effective date of the action
until the date of payment, at the average rate currently paid by the entity on
its principal bank loans or, if it has no bank loans, at a rate that is fair
and equitable under all of the circumstances.
92A.350 Rights of Dissenting Partner of Domestic Limited Partnership.--A
partnership agreement of a domestic limited partnership or, unless otherwise
provided in the partnership agreement, an agreement of merger or exchange, may
provide that contractual rights with respect to the partnership interest of a
dissenting general or limited partner of a domestic limited partnership are
available for any class or group of partnership interests in connection with
any merger or exchange in which the domestic limited partnership is a
constituent entity.
92A.360 Rights of Dissenting Member of Domestic Limited-Liability Company.--
The articles of organization or operating agreement of a domestic limited-
liability company or, unless otherwise provided in the articles of
organization or operating agreement, an agreement of merger or exchange, may
provide that contractual rights with respect to the interest of a dissenting
member are available in connection with any merger or exchange in which the
domestic limited-liability company is a constituent entity.
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92A.370 Rights of Dissenting Member of Domestic Nonprofit Corporation.--1.
Except as otherwise provided in subsection 2 and unless otherwise provided in
the articles or bylaws, any member of any constituent domestic nonprofit
corporation who voted against the merger may, without prior notice, but within
30 days after the effective date of the merger, resign from membership and is
thereby excused from all contractual obligations to the constituent or
surviving corporations which did not occur before his resignation and is
thereby entitled to those rights, if any, which would have existed if there
had been no merger and the membership had been terminated or the member had
been expelled.
2. Unless otherwise provided in its articles of incorporation or bylaws, no
member of a domestic nonprofit corporation, including, but not limited to, a
cooperative corporation, which supplies services described in chapter 704 of
NRS to its members only, and no person who is a member of a domestic nonprofit
corporation as a condition of or by reason of the ownership of an interest in
real property, may resign and dissent pursuant to subsection 1.
92A.380 Rights of Stockholder to Dissent from Certain Corporate Actions and
to Obtain Payment for Shares.--1. Except as otherwise provided in NRS 92A.370
to 92A.390, a stockholder is entitled to dissent from, and obtain payment of
the fair value of his shares in the event of any of the following corporate
actions:
(a) Consummation of a plan of merger to which the domestic corporation is
a party:
(1) If approval by the stockholders is required for the merger by NRS
92A.120 to 92A.160, inclusive, or the articles of incorporation and he
is entitled to vote on the merger; or
(2) If the domestic corporation is a subsidiary and is merged with
its parent under NRS 92A.180.
(b) Consummation of a plan of exchange to which the domestic corporation
is a party as the corporation whose subject owner's interests will be
acquired, if he is entitled to vote on the plan.
(c) Any corporate action taken pursuant to a vote of the stockholders to
the event that the articles of incorporation, bylaws or a resolution of the
board of directors provides that voting or nonvoting stockholders are
entitled to dissent and obtain payment for their shares.
2. A stockholder who is entitled to dissent and obtain payment under NRS
92A.300 to 92A.500, inclusive, may not challenge the corporate action creating
his entitlement unless the action is unlawful or fraudulent with respect to
him or the domestic corporation.
92A.390 Limitations on Right of Dissent: Stockholders of Certain Classes or
Series; Action of Stockholders Not Required for Plan of Merger.--1. There is
no right of dissent with respect to a plan of merger or exchange in favor of
stockholders of any class or series which, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting at which the plan of merger or exchange is to be acted on, were either
listed on a national securities exchange, included in the national market
system by the National Association of Securities Dealers, Inc., or held by at
least 2,000 stockholders of record, unless:
(a) The articles of incorporation of the corporation issuing the shares
provide otherwise; or
(b) The holders of the class or series are required under the plan of
merger or exchange to accept for the shares anything except:
(1) Cash, owner's interests or owner's interests and cash in lieu of
fractional owner's interests of:
(I) The surviving or acquiring entity; or
(II) Any other entity which, at the effective date of the plan of
merger or exchange, were either listed on a national securities
exchange, included in the national market system by the National
Association of Securities Dealers, Inc., or held of record by a
least 2,000 holders of owner's interests of record; or
(2) A combination of cash and owner's interests of the kind described
in sub-subparagraphs (I) and (II) of subparagraph (1) of paragraph (b).
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2. There is no right of dissent for any holders of stock of the surviving
domestic corporation if the plan of merger does not require action of the
stockholders of the surviving domestic corporation under NRS 92A.130.
92A.400 Limitations on Right of Dissent: Assertion as to Portions Only to
Shares Registered to Stockholder; Assertion by Beneficial Stockholder.--1. A
stockholder may assert dissenter's rights as to fewer than all of the shares
registered in his name only if he dissents with respect to all shares
beneficially owned by any one person and notifies the subject corporation in
writing of the name and address of each person on whose behalf he asserts
dissenter's rights. The rights of a partial dissenter under this subsection
are determined as if the shares as to which he dissents and his other shares
were registered in the names of different stockholders.
2. A beneficial stockholder may assert dissenter's rights as to shares held
on his behalf only if:
(a) He submits to the subject corporation the written consent of the
stockholder of record to the dissent not later than the time the beneficial
stockholder asserts dissenter's rights; and
(b) He does so with respect to all shares of which he is the beneficial
stockholder or over which he has the power to direct the vote.
92A. 410 Notification of Stockholders Regarding Right of Dessent.--1. If a
proposed corporate action creating dissenters' rights is submitted to a vote
at a stockholders' meeting, the notice of the meeting must state that
stockholders are or may be entitled to assert dissenters' rights under NRS
92A.300 to 92A.500, inclusive, and be accompanied by a copy of those sections.
2. If the corporate action creating dissenters' rights is taken without a
vote of the stockholders, the domestic corporation shall notify in writing all
stockholders entitled to assert dissenters' rights that the action was taken
and send them the dissenter's notice described in NRS 92A.430.
92A.420 Prerequisites to Demand for Payment of Shares.--1. If a proposed
corporate action creating dissenters' rights is submitted to a vote at a
stockholders' meeting, a stockholder who wishes to assert dissenter's rights:
(a) Must deliver to the subject corporation, before the vote is taken,
written notice of his intent to demand payment for his shares if the
proposed action is effectuated; and
(b) Must not vote his shares in favor of the proposed action.
2. A stockholder who does not satisfy the requirements of subsection 1 is
not entitled to payment for his shares under this chapter.
92A.430 Dissenter's Notice: Delivery to Stockholders Entitled to Assert
Rights; Contents.--1. If a proposed corporate action creating dissenters'
rights is authorized at a stockholders' meeting, the subject corporation shall
deliver a written dissenter's notice to all stockholders who satisfied the
requirements to assert those rights.
2. The dissenter's notice must be sent no later than 10 days after the
effectuation of the corporate action, and must:
(a) State where the demand for payment must be sent and where and when
certificates, if any, for shares must be deposited;
(b) Inform the holders of shares not represented by certificates to what
extent the transfer of the shares will be restricted after the demand for
payment is received;
(c) Supply a form for demanding payment that includes the date of the
first announcement to the news media or to the stockholders of the terms of
the proposed action and requires that the person asserting dissenter's
rights certify whether or not he acquired beneficial ownership of the
shares before that date;
D-3
<PAGE>
(d) Set a date by which the subject corporation must receive the demand
for payment, which may not be less than 30 nor more than 60 days after the
date the notice is delivered; and
(e) Be accompanied by a copy of NRS 92A.300 to 92A.500, inclusive.
92A.440 Demand for Payment and Deposit of Certificates; Retention of Rights
of Stockholder.--1. A stockholder to whom a dissenter's notice is sent must:
(a) Demand payment;
(b) Certify whether he acquired beneficial ownership of the shares before
the date required to be set forth in the dissenter's notice for this
certification; and
(c) Deposit his certificates, if any, in accordance with the terms of the
notice.
2. The stockholder who demands payment and deposits his certificates, if
any, retains all other rights of a stockholder until those rights are canceled
or modified by the taking of the proposed corporate action.
3. The stockholder who does not demand payment or deposit his certificates
where required, each by the date set forth in the dissenter's notice, is not
entitled to payment for his shares under this chapter.
92A.450 Uncertified Shares: Authority to Restrict Transfer After Demand for
Payment; Retention of Rights of Stockholder.--1. The subject corporation may
restrict the transfer of shares not represented by a certificate from the date
the demand for their payment is received.
2. The person for whom dissenter's rights are asserted as to shares not
represented by a certificate retains all other rights of a stockholder until
those rights are canceled or modified by the taking of the proposed corporate
action.
92A.460 Payment for Shares: General Requirements.--1. Except as otherwise
provided in NRS 92A.470, within 30 days after receipt of a demand for payment,
the subject corporation shall pay each dissenter who complied with NRS 92A.440
the amount the subject corporation estimates to be the fair value of his
shares, plus accrued interest. The obligation of the subject corporation under
this subsection may be enforced by the district court:
(a) Of the county where the corporation's registered office is located;
or
(b) At the election of any dissenter residing or having its registered
office in this state, of the county where the dissenter resides or has its
registered office. The court shall dispose of the complaint promptly.
2. The payment must be accompanied by:
(a) The subject corporation's balance sheet as of the end of a fiscal
year ending not more than 16 months before the date of payment, a statement
of income for that year, a statement of changes in the stockholders' equity
for that year and the latest available interim financial statements, if
any;
(b) A statement of the subject corporation's estimate of the fair value
of the shares;
(c) An explanation of how the interest was calculated;
(d) A statement of the dissenter's rights to demand payment under NRS
92A.480; and
(e) A copy of NRS 92A.300 to 92A.500, inclusive.
92A.470 Payment for Shares: Shares Acquired on or After Date of Dissenter's
Notice.--1. A subject corporation may elect to withhold payment from a
dissenter unless he was the beneficial owner of the shares before the date set
forth in the dissenter's notice as the date of the first announcement to the
news media or to the stockholders of the terms of the proposed action.
2. To the extent the subject corporation elects to withhold payment, after
taking the proposed action, it shall estimate the fair value of the shares,
plus accrued interest, and shall offer to pay this amount to each dissenter
who agrees to accept it in full satisfaction of his demand. The subject
corporation shall send with its offer a statement of its estimate of the fair
value of the shares, an explanation of how the interest was calculated, and a
statement of the dissenters' right to demand payment pursuant to NRS 92A.480.
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<PAGE>
92A.480 Dissenter's Estimate of Fair Value: Notification of Subject
Corporation; Demand for Payment of Estimate.--1. A dissenter may notify the
subject corporation in writing of his own estimate of the fair value of his
shares and the amount of interest due, and demand payment of his estimate,
less any payment pursuant to NRS 92A.460, or reject the offer pursuant to NRS
92A.470 and demand payment of the fair value of his shares and interest due,
if he believes that the amount paid pursuant to NRS 92A.460 or offered
pursuant to NRS 92A.47 is less than the fair value of his shares or that the
interest is incorrectly calculated.
2. A dissenter waives his right to demand payment pursuant to this section
unless he notifies the subject corporation of his demand in writing within 30
days after the subject corporation made or offered payment for his shares.
92A.490 Legal Proceeding to Determione Fair Value: Duties of Subject
Corporation; Powers of Court; Rights of Dissenter.--1. If a demand for payment
remains unsettled, the subject corporation shall commence a proceeding within
60 days after receiving the demand and petition the court to determine the
fair value of the shares and accrued interest. If the subject corporation does
not commence the proceeding within the 60-day period, it shall pay each
dissenter whose demand remains unsettled the amount demanded.
2. A subject corporation shall commence the proceeding in the district court
of the county where its registered office is located. If the subject
corporation is a foreign entity without a resident agent in the state, it
shall commence the proceeding in the county where the registered office of the
domestic corporation merged with or whose shares were acquired by the foreign
entity was located.
3. The subject corporation shall make all dissenters, whether or not
residents of Nevada, whose demands remain unsettled, parties to the proceeding
as in an action against their shares. All parties must be served with a copy
of the petition. Nonresidents may be served by registered or certified mail or
by publication as provided by law.
4. The jurisdiction of the court in which the proceeding is commenced under
subsection 2 is plenary and exclusive. The court may appoint one or more
persons as appraisers to receive powers described in the order appointing
them, or any amendment thereto. The dissenters are entitled to the same
discovery rights as parties in other civil proceedings.
5. Each dissenter who is made a party to the proceeding is entitled to a
judgment:
(a) For the amount, if any, by which the court finds the fair value of
his shares, plus interest, exceeds the amount paid by the subject
corporation; or
(b) For the fair value, plus accrued interest, of his after-acquired
shares for which the subject corporation elected to withhold payment
pursuant to NRS 92A.470.
92A.500 Legal Proceeding to Determine Fair Value: Assessment of Costs and
Fees.--1. The court in a proceeding to determine fair value shall determine
all of the costs of the proceeding, including the reasonable compensation and
expenses of any appraisers appointed by the court. The court shall assess the
costs against the subject corporation, except that the court may assess costs
against all or some of the dissenters, in amounts the court finds equitable,
to the extent the court finds the dissenters acted arbitrarily, vexatiously or
not in good faith in demanding payment.
2. The court may also assess the fees and expenses of the counsel and
experts for the respective parties, in amounts the court finds equitable:
(a) Against the subject corporation and in favor of all dissenters if the
court finds the subject corporation did not substantially comply with the
requirements of NRS 92A.300 to 92A.500, inclusive; or
(b) Against either the subject corporation or a dissenter in favor of any
other party, if the court finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously or not in good faith
with respect to the rights provided by NRS 92A.300 to 92A.500, inclusive.
D-5
<PAGE>
3. If the court finds that the services of counsel for any dissenter were of
substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the subject corporation, the
court may award to those counsel reasonable fees to be paid out of the amounts
awarded to the dissenters who were benefited.
4. In a proceeding commenced pursuant to NRS 92A.460, the court may assess
the costs against the subject corporation, except that the court may assess
costs against all or some of the dissenters who are parties to the proceeding,
in amounts the court finds equitable, to the extent the court finds that such
parties did not act in good faith in instituting the proceeding.
5. This section does not preclude any party in a proceeding commenced
pursuant to NRS 92A.460 or 92A.490 from applying the provisions of N.R.C.P. 68
or NRS 17.115.
D-6
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Set forth below is a description of certain provisions of the Old ZMAX
Articles of Incorporation, Old ZMAX Bylaws and Nevada Law, as well as the New
ZMAX Certificate of Incorporation, New ZMAX Bylaws and Delaware Law, as such
provisions relate to the indemnification of the directors and officers of Old
and New ZMAX. These descriptions are intended only as a summary and are
qualified in their entirety by reference to the complete documents.
Elimination of Liability in Certain Circumstances
OLD ZMAX. Article XI of the Old ZMAX Articles of Incorporation provides that
no director or officer of Old ZMAX is personally liable to Old ZMAX or its
stockholders with respect to any acts or omissions that occur in the
performance of his or her duties as a director or officer of Old ZMAX, except
liability for acts or omissions involving (i) intentional misconduct, fraud or
a violation of law, or (ii) payment of distributions in violation of Section
78.300 of the Nevada Law, which imposes liability on directors for prohibited
distributions to stockholders. The Old ZMAX Articles of Incorporation further
provide that, if the Nevada Law is amended to extend further protection to
officers or directors, then the stockholders may approve further limitations
on liability in the Articles of Incorporation to the full extent of the Nevada
Law. The Company is not permitted under the Nevada Law to limit the liability
of directors for (i) any breach of the director's duty of loyalty to such
corporation or its stockholders, or (ii) any transaction from which the
director derived an improper personal benefit.
NEW ZMAX. As of the Effective Time, the New ZMAX Certificate of
Incorporation will provide that, to the full extent permitted by Delaware Law
or any other applicable laws, no director of New ZMAX shall be personally
liable to New ZMAX or its stockholders with respect to any acts or omissions
in the performance of his or her duties as a director of Old ZMAX. The
Delaware Law provides that a corporation may limit or eliminate a director's
personal liability for monetary damages to the corporation or its
stockholders, except for liability for (i) any breach of the director's duty
of loyalty to such corporation or its stockholders, (ii) acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) paying a dividend or approving a stock repurchase in violation
of Section 174 of the Delaware Law or (iv) any transaction from which the
director derived an improper personal benefit.
Indemnification and Insurance
OLD ZMAX. Section 78.751 of the Nevada Law permits corporations to indemnify
directors, officers, employees and agents (including individuals acting in
that capacity for another corporation at the request of the indemnifying
corporation) for expenses incurred in connection with any proceeding, as long
as the individual acted "in good faith and in a manner which he reasonably
believed to be in or not opposed to the best interests of the corporation,
and, with respect to any criminal action or proceeding, had no reasonable
cause to believe his conduct was unlawful." An adverse result against an
indemnitee does not necessarily determine that indemnification is not
available. Indemnification is permitted even though the individual no longer
serves in the appropriate capacity, as long as he or she was serving in that
capacity when the conduct occurred. To the extent that an individual is
successful in defending against a claim subject to indemnification, the
corporation must indemnify him or her for the expense of the defense. A
corporation may advance expenses of pursuing a proceeding giving rise to a
right of indemnification, if the individual agrees to repay such expenses if
indemnification ultimately is denied.
The determination to pay a claim for indemnification must be made by either
(i) the stockholders, (ii) majority vote of the board of directors of a quorum
consisting of directors who were not a party to the proceeding; (iii) by legal
opinion, if ordered by a majority as described in (ii) above; or (iv) by legal
opinion, if a majority described in (ii) cannot be obtained.
II-1
<PAGE>
The Old ZMAX Articles of Incorporation provision on indemnification closely
follows the Nevada Law. Article XII of the Old ZMAX Articles of Incorporation
provides that the Company will indemnify its directors, officers, employees
and agents (as well as persons serving at the Corporation's request as an
director, officer, employee or agent of another entity) if they are made a
party (or threatened with being made a party) to any proceeding because of
their status as a director, officer, employee or agent. This indemnification
applies whether the alleged basis for such proceeding is action taken in an
official capacity or an unofficial capacity. Article XII specifically provides
that these individuals are indemnified to the fullest extent permitted by the
Nevada Law against all expense, liability and loss, including attorneys' fees,
judgments, fines, ERISA excise taxes or penalties and amounts paid in
settlement, that are reasonably incurred in connection with the proceeding.
Further, under the Old ZMAX Articles of Incorporation, an indemnitee remains
indemnified for acts taken while serving as a director, office, employee or
agent even though the indemnitee no long serves in that capacity. If the
proceeding is initiated by the indemnitee against the Corporation, Article XII
provides for indemnification only if the Board of Directors authorized the
proceeding.
Indemnitees are entitled to advancement of expenses to defend proceedings
where they are subject to indemnification. Article XII further provides that,
if the Nevada Law requires, indemnified directors and officers must, as a
condition of receiving an advancement of expenses, agree to repay the advanced
expenses if ultimately it is found that the indemnitee is not entitled to
indemnification for such expenses.
If the Corporation does not pay claims for indemnification within 60 days,
the indemnitee may sue the Corporation to recover the unpaid amount of the
claim. If the claim is for advancement of expenses, the indemnitee may sue the
Corporation is the claim remains unpaid for 20 days, and if the indemnitee is
successful in a suit for a claim of advancement of expenses, the indemnitee is
entitled to the cost of prosecuting the action to recover expenses. In any
suit against the Corporation for indemnification, except a suit for
advancement of expenses, the Corporation may raise the defense that the
indemnitee's conduct did not meet the standard of the Nevada Law. The
Corporation has the burden of proof in any suit brought to enforce rights of
indemnification against the Corporation, including suits for advancement of
expenses.
NEW ZMAX. Similar to the Nevada Law, the Delaware Law permits corporations
to indemnify directors and officers as well as other employees and individuals
against expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement in connection with specified actions, suits or proceedings,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the corporation) if they acted in good faith and in a
manner they reasonably believed to be in, or not opposed to, the best interest
of the corporation, and with respect to any criminal action or proceeding, had
no reasonable cause to believe their conduct was unlawful. However, different
from the Nevada Law, Delaware corporations may not indemnify against any
claim, issue or matter as to which the indemnified person is adjudged liable
to the corporation, unless, and only to the extent that, the Delaware Court of
Chancery (or the court in which such action or suit was brought) determines
upon application that, despite the adjudication of liability, but in view of
all the circumstances of the case, the indemnified person is fairly and
reasonably entitled to indemnity for such expenses, which the Delaware Court
of Chancery or such other court deems proper.
As of the Effective Time, the New ZMAX Certificate of Incorporation will
indemnify the directors, officer, employees, agents of New ZMAX to the fullest
extent permitted by the Delaware Law, or any other applicable law. Similar to
the Old ZMAX Articles of Incorporation, the New ZMAX Certificate of
Incorporation will provide indemnification for the same range of costs and
expenses, will permit advancement of expenses, and will permit indemnitees the
same rights to sue to recover indemnified amounts.
II-2
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
The following exhibits are filed as part of this Registration Statement.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
2.1 Stock Purchase Agreement among ZMAX Corporation, Michael C. Higgins
and Michael S. Cannon, dated November 6, 1996 (acquisition of
Century Services, Inc. operating subsidiary by ZMAX Corporation).
The exhibits to the Stock Purchase Agreement not otherwise filed
herewith have been omitted as immaterial, and the Co-Registrants
will furnish such exhibits and schedules to the Commission
supplementally on request.
2.2 Agreement and Plan of Merger between ZMAX Corporation and New ZMAX
Corporation, dated June 10, 1997 (included as Annex A to the Proxy
Statement/Prospectus that is a part of this Registration Statement).
3.1 Complete Copy of Articles of Incorporation of ZMAX Corporation, as
amended
3.2 Complete Copy of Bylaws of ZMAX Corporation, as amended
3.3 Certificate of Incorporation of New ZMAX Corporation, filed with the
Secretary of State of Delaware on May 30, 1997
3.4 By-laws of New ZMAX Corporation, adopted by the Board of Directors
on June 10, 1997
3.5 Form of Amended and Restated Certificate of Incorporation of New
ZMAX Corporation to be filed as part of the Certificate of Merger
with the Secretary of State of Delaware to effectuate the Merger
(included as Annex B to the Proxy Statement/Prospectus that is a
part of this Registration Statement)
3.6 Form of Amended and Restated By-laws of New ZMAX Corporation, to be
filed as part of the Certificate of Merger with the Secretary of
State of Delaware to effectuate the Merger (included as Annex C to
the Proxy Statement/Prospectus that is a part of this Registration
Statement)
4.1 Form of ZMAX Corporation 8% Convertible Exchangeable Subordinated
Debentures
4.2 Form of Warrant to Purchase Common Stock of ZMAX Corporation
5.1* Opinion of Powell, Goldstein, Frazer & Murphy LLP regarding the
validity of the New ZMAX securities registered hereby
5.2* Opinion of Erwin, Thompson & Hascheff regarding the validity of the
Old ZMAX securities registered hereby
10.1 ZMAX Corporation 1997 Stock Incentive Plan
10.2 Form of ZMAX Corporation 1997 Nonqualified Stock Option Award (form
of grant and vesting schedule)
10.3 ZMAX Corporation 1997 Directors Formula Stock Option Plan
10.4 Form of ZMAX Corporation Directors Formula Stock Option Award (form
of grant and vesting schedule)
10.5 Employment Agreement between Century Services, Inc. and Michael C.
Higgins, dated November 6, 1996
10.6 First Amendment to the Employment Agreement between Century
Services, Inc. and Michael C. Higgins, dated May 21, 1997
10.7 Employment Agreement between Century Services, Inc. and Joseph Yeh,
dated June 18, 1997
10.8 Separation Agreement between Century Services, Inc. and Michael S.
Cannon, dated April 22, 1997
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.9 Consulting Agreement among ZMAX Corporation, MBY, Inc. and Michel
Berty, dated April 1, 1997
10.10 Consulting Agreement among ZMAX Corporation, Wareham Management Ltd.
and G.W. Norman Wareham, dated May 30, 1997
10.11 Consulting Agreement between ZMAX Corporation and Shafiq Nazerali,
dated May 30, 1997
10.12 Earn Out Stock Escrow Agreement among ZMAX Corporation, Michael C.
Higgins, Michael S. Cannon and Powell, Goldstein, Frazer & Murphy,
dated November 6, 1996
10.13 ZMAX Corporation Stockholders Agreement among Michael C. Higgins,
Michael S. Cannon and ZMAX Corporation, dated November 6, 1996
10.14 Stock Pledge and Security Agreement from Michael C. Higgins in favor
of ZMAX Corporation, dated November 6, 1996
10.15 Letter Agreement among ZMAX Corporation, IMS International, Inc.,
Wan Hsien Information International Corporation, Ltd., Multi-
Dimension International, and Institute for Information Industry
Regarding the Purchase by ZMAX Corporation of the "COCACT" Software
Program, dated April 30, 1997
10.16 Letter Agreement between ZMAX Corporation and Institute for
Information Industry Regarding the Purchase by ZMAX Corporation of
the "COCACT" Software Program, dated April 30, 1997
10.17* Letter Agreement between ZMAX Corporation and Wan Hsien Information
International Corporation Ltd. Regarding the Purchase by ZMAX
Corporation of the "COCACT" Software Program, dated April 30, 1997
10.18 Conversion Agreement between Fiserv Federal Systems, Inc. and ZMAX
Corporation, dated April 28, 1997
10.19 Agreement between ZMAX Corporation and Investor Communications
Company, LLC, dated as of May 20, 1997
10.20 Investor Relations Consulting Agreement between ZMAX Corporation and
Investor Communications Company, LLC, dated as of May 20, 1997
11.1 Statement regarding computation of earnings per share
21.1 Subsidiaries of ZMAX Corporation
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Amisano Hanson, Chartered Accountants
23.3 Consent of Powell, Goldstein, Frazer & Murphy LLP (included in
Exhibit 5.1)
23.4 Consent of Erwin, Thompson & Hascheff (included in Exhibit 5.2)
23.5 Consent of Edward Yourdon to be named as nominee for election to Old
ZMAX Board of Directors
24.1 Powers of Attorney (included on signature pages hereto)
99.1 Proxy Card for the ZMAX Corporation 1997 Annual Meeting of the
Stockholders
99.2* Letter of Transmittal for Exchange Offer
</TABLE>
- --------
* To be filed by amendment.
(b) None.
(c) The three transactions that will effect the reincorporation merger
contemplated by this Registration Statement will not result in net proceeds to
either Old ZMAX or New ZMAX.
II-4
<PAGE>
ITEM 22. UNDERTAKINGS.
Insofar as indemnification of liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Co-Registrants pursuant to the foregoing provisions, or otherwise, the Co-
Registrants have been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by either Co-
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Co-Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Co-Registrant will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
The undersigned Co-Registrants hereby undertake to supply by means of a
post-effective amendment all information concerning a transaction, and the
merger involved therein, that was not the subject of or included in the
Registration Statement when it became effective.
[SIGNATURES APPEAR ON FOLLOWING PAGES]
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, EACH CO-
REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF
WASHINGTON, D.C., ON JUNE 20, 1997.
ZMAX Corporation
/s/ Michael C. Higgins
By: _________________________________
MICHAEL C. HIGGINS, PRESIDENT
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each person whose signature appears
on the signature pages to this Registration Statement constitutes and appoints
Michael C. Higgins and Michel Berty, and each of them, his true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for the undersigned and in his name, place, and stead, in any
and all capacities, to sign any and all amendments to this Registration
Statement, and to file the same, will all exhibits hereto and other documents
in connection therewith with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents and each of them, full power and
authority to do so and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents or either of them or their or his
substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATE INDICATED.
ZMAX CORPORATION
SIGNATURE TITLE DATE
/s/ Michael C. Higgins President and June 20, 1997
- ------------------------------------- Director
MICHAEL C. HIGGINS
/s/ Michel Berty Chairman of the June 20, 1997
- ------------------------------------- Board of Directors
MICHEL BERTY
/s/ G.W. Norman Wareham Chief Financial June 20, 1997
- ------------------------------------- Officer and
G.W. NORMAN WAREHAM Director
/s/ Steve L. Komar Director June 20, 1997
- -------------------------------------
STEVE L. KOMAR
II-6
<PAGE>
SIGNATURE TITLE DATE
/s/ Ted Fine Director June 20, 1997
- -------------------------------------
TED FINE
/s/ Robert H. Miller Director June 20, 1997
- -------------------------------------
ROBERT H. MILLER
II-7
<PAGE>
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, EACH CO-
REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF
WASHINGTON, D.C., ON JUNE 20, 1997.
New ZMAX Corporation
/s/ Michael C. Higgins
By: _________________________________
MICHAEL C. HIGGINS, PRESIDENT
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each person whose signature appears
on the signature pages to this Registration Statement constitutes and appoints
Michael C. Higgins and Michel Berty, and each of them, his true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for the undersigned and in his name, place, and stead, in any
and all capacities, to sign any and all amendments to this Registration
Statement, and to file the same, will all exhibits hereto and other documents
in connection therewith with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents and each of them, full power and
authority to do so and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents or either of them or their or his
substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATE INDICATED.
NEW ZMAX CORPORATION
SIGNATURE TITLE DATE
/s/ Michel Berty Director June 20, 1997
- -------------------------------------
MICHEL BERTY
/s/ Michael C. Higgins Director June 20, 1997
- -------------------------------------
MICHAEL C. HIGGINS
II-8
<PAGE>
Exhibit 2.1
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (this "Agreement") is entered into on
November 6, 1996, among ZMAX Corporation, a Nevada corporation ("ZMAX"); and
Michael S. Cannon, a resident of the Commonwealth of Virginia, and Michael C.
Higgins, a resident of the State of Maryland, being the holders of all the
issued and outstanding capital stock of Century Services, Inc., a Maryland
corporation ("CSI") (individually, a "Stockholder" and collectively, the
"Stockholders").
BACKGROUND:
All of the issued and outstanding capital stock consisting of 200 shares of
voting common stock, par value $1.00, of CSI (the "CSI Stock") is owned by the
Stockholders.
The Stockholders have agreed to sell to ZMAX and ZMAX has agreed to
purchase the CSI Stock from the Stockholders on the terms and conditions set
forth in this Agreement.
In consideration of the mutual representations, warranties, covenants and
agreements contained in this Agreement, the parties agree as follows:
STATEMENT OF TERMS:
SECTION 1
PURCHASE AND SALE OF STOCK
1.1 Purchase and Sale of Stock. Stockholders will sell to ZMAX and ZMAX
--------------------------
will purchase from Stockholders all of the Stockholders' right, title and
interest in the CSI Stock.
1.2 Consideration; Stock Exchange. At the Closing (as defined in Section
-----------------------------
2.1 below), upon surrender of the certificates evidencing the CSI Stock duly
endorsed for transfer to ZMAX, ZMAX will cause 3,200,000 shares of the common
voting stock, par value $0.001 of ZMAX (the "ZMAX Stock") (the "Consideration")
to be issued to the Stockholders pursuant to Section 1.5 of this Agreement. As
a result of the sale of the CSI Stock and the payment of the Consideration, CSI
will be a wholly-owned subsidiary of ZMAX.
1.3 Issuance of ZMAX Stock to Stockholders. At the Closing, each
--------------------------------------
Stockholder will receive stock certificates evidencing 200,000 shares of ZMAX
Stock. In addition, ZMAX will issue to each Stockholder a stock certificate
evidencing 1,400,000 shares of ZMAX Stock (collectively, the "Earn Out Stock"),
which Earn Out Stock will be placed in escrow pursuant to the escrow agreement
attached as Exhibit A to this Agreement (the "Earn Out Stock Escrow Agreement")
---------
and will be released to the Stockholders on the terms and conditions set forth
in Section 1.5.
<PAGE>
1.4 No Further Ownership Rights in CSI Stock. The issuance of the 400,000
----------------------------------------
shares of ZMAX Stock to be delivered to the Stockholders at Closing and the
issuance of the 2,800,000 shares of Earn Out Stock to be released to the
Stockholders in accordance with the terms of this Agreement will be deemed to
have been given in full satisfaction of all rights pertaining to the CSI Stock.
1.5 Release of Earn Out Stock; Terms of Earn Out. The 2,800,000 shares of
--------------------------------------------
Earn Out Stock will be subject to release quarterly. The Earn Out Stock will be
released to the Stockholders on a pro rata basis to each Stockholder. One share
of Earn Out Stock will be released for each $1.25 of Cash Flow (as defined
below) generated by CSI. For purposes of this Section 1.5, the term "Cash Flow"
means, with respect to each CSI fiscal year quarter or other period, all
operating revenues from sales and services and licensing and franchising income
(but excluding proceeds from loans or capital infusions and proceeds from sales,
exchanges and other dispositions of property or rights not in the ordinary
course of business) LESS direct operating expenses including software licensing
fees and a provision for CSI's income taxes calculated based on the then-
applicable statutory rates (but excluding capital expenses, depreciation,
amortization, debt service, dividends and intercompany charges other than
charges that would be direct operating expenses if paid by CSI). Cash Flow will
be determined by Arthur Andersen (or such other independent accounting firm then
serving CSI) for the relevant period on a cash basis. ZMAX will cause Arthur
Andersen to prepare a statement of Cash Flow ("Cash Flow Statement") for each
fiscal year quarter which will set forth an itemized calculation of Cash Flow
and calculate the number of shares of Earn Out Stock (to the nearest whole
number of shares) based on the Cash Flow for the relevant period and to deliver
the Cash Flow Statement to ZMAX. Upon receipt of the Cash Flow Statement, ZMAX
will fax the Cash Flow Statement to each Stockholder. Upon approval of the Cash
Flow Statement as evidenced by the signing of the Cash Flow Statement by both
ZMAX and each Stockholder, ZMAX will deliver the Cash Flow Statement to the
escrow agent under the Earn Out Stock Escrow Agreement. Upon receipt of the
signed Cash Flow Statement, the escrow agent will cause the shares of Earn Out
Stock to be released to the Stockholders in accordance with the procedures
described in the Earn Out Stock Escrow Agreement. Once released from the Earn
Out Stock Escrow Agreement such shares will no longer be deemed Earn Out Stock
for purposes of this Agreement.
1.6 Resolution of Disputes Regarding Cash Flow. If ZMAX and the
------------------------------------------
Stockholders cannot agree on the Cash Flow Statement prepared by the independent
accounting firm for any quarter, the ZMAX Board of Directors will prepare and
sign a Cash Flow Statement and fax it to the Stockholders. If the ZMAX Board of
Directors' Cash Flow Statement is approved by the Stockholders, as evidenced by
the signature of the Stockholders, ZMAX will submit it to the escrow agent under
the Earn Out Stock Escrow Agreement. If the Stockholders are not satisfied with
the Cash Flow Statement prepared by the ZMAX Board of Directors (the "Dispute"),
the Stockholders may submit the Dispute to binding arbitration administered by
the American Arbitration Association ("AAA") under its Commercial Arbitration
Rules, except where those rules are supplemented or modified by the express
terms of this section. The parties agree that binding arbitration is the
exclusive remedy for resolving any Dispute. The Stockholders may initiate
arbitration by sending notice of its intention to arbitrate the Dispute to ZMAX,
which
-2-
<PAGE>
notice must be accompanied by a brief setting forth the nature of the Dispute
and the remedy sought, which brief may not exceed 25 typed pages (the
"Arbitration Notice"). The Stockholders must also file at the regional office
of the AAA three copies of the Arbitration Notice and Brief and the arbitration
provision of this Agreement together with the required filing fee. ZMAX must
file a responsive brief within 15 business days of receipt of the Stockholders'
Arbitration Notice and Brief, which responsive brief may not exceed 25 typed
pages. Any arbitration proceedings will be in Washington, D.C. If the parties
are able to agree on one arbitrator within 15 days of the date the Arbitration
Notice is filed with the AAA, the Dispute will be heard by that arbitrator. If
the parties are unable to agree on one arbitrator, then an arbitrator will be
selected from an impartial roster of arbitrators provided by the AAA in
accordance with the AAA rules. There will be no discovery permitted by the
parties in the arbitration proceedings provided that each party will be
permitted to take one oral deposition of the other party or unless otherwise
mutually agreed to by the parties. ZMAX agrees to be bound by Rule 30(b)(6) of
the Federal Rules of Civil Procedures "Deposition of an Organization," as
amended from time to time or any successor rule. The arbitrator will issue a
decision within 30 days of his or her appointment. The decision of the
arbitrator must set forth in reasonable detail the reasoning supporting the
decision of the arbitrator. The decision rendered by the arbitrator will be
final and binding on the parties and judgment on the decision rendered by the
arbitrator may be entered in any court having jurisdiction. Each party will pay
its own costs and expenses related to the arbitration procedures. This
agreement to arbitrate is specifically enforceable under the prevailing
arbitration law and survives the termination of this Agreement.
1.7 Termination of Rights to Earn Out Stock. If any Stockholder is
---------------------------------------
terminated by CSI for cause (as defined in the Stockholder's employment
agreement with CSI) or violates the non-competition, non-solicitation or
proprietary information restrictions in his employment agreement with CSI, the
Earn Out Stock issued in the name of the Stockholder will automatically
terminate and will be returned to ZMAX in accordance with the procedures
described in the Earn Out Stock Escrow Agreement.
1.8 Voting Rights to Earn Out Stock. The Stockholders will be entitled to
-------------------------------
vote the Earn Out Stock even though it is subject to the Earn Out Stock Escrow
Agreement on the following terms and conditions. If an annual or special
meeting of the ZMAX Stockholders is called, the Stockholders will be entitled to
receive notice of such meeting and to attend such meeting and vote all of the
shares of ZMAX stock issued in their name, including the Earn Out Stock, in
person or by proxy.
1.9 Dividend and Distribution Rights for Earn Out Stock. The Stockholders
---------------------------------------------------
are entitled to receive dividends or other distributions made by ZMAX (including
distributions in liquidation) on the Earn Out Stock.
1.10 Antidilution. ZMAX agrees that so long as CSI has entered into three
------------
contracts to provide quantifiable services related to the resolution of the
"Year 2000 problem" involving at least 1,000,000 lines of code per contract with
United States government agencies or
-3-
<PAGE>
government agencies of any state and/or commercial companies within 60 days of
the date of this Agreement, the percentage holdings of ZMAX represented by the
ZMAX Stock issued to the Stockholders will not be less than 34.2% (assuming the
Stockholders earn all of the Earn Out Stock) after giving effect to the
1,000,000 shares of ZMAX Stock to be issued in connection with the $5,000,000
private placement contemplated by ZMAX but without taking into account any
future purchases of newly issued ZMAX Stock, if any.
1.11 Use of Private Placement Proceeds. ZMAX agrees that $4,000,000 of
---------------------------------
the $5,000,000 private placement referred to in Section 1.10 will be earmarked
for working capital of CSI and will be released to CSI as needed based on
operational budgets of CSI approved by the ZMAX Board of Directors, from time to
time, taking into account business needs.
SECTION 2
CLOSING; CLOSING CONDITIONS
2.1 Closing. The parties to this Agreement will hold a closing (the
-------
"Closing") for the purpose of confirming the transactions contemplated by this
Agreement at 10:00 am on November 6, 1996 or such other date and time mutually
agreed upon by the parties. The Closing will be held at the offices of Powell,
Goldstein, Frazer & Murphy at 1001 Pennsylvania Avenue, N.W., Sixth Floor South,
Washington, D.C. 20004. The date on which the Closing actually occurs is
hereinafter referred to as the "Closing Date." At the Closing, the parties will
execute and exchange the following documents, items, certificates and
instruments described in this Section 2. The parties agree that the Closing
will occur through the procedures described in the escrow agreement attached as
Exhibit B to this Agreement (the "Closing Escrow Agreement").
- ---------
2.2 Conditions to Closing of ZMAX. ZMAX's obligation to consummate the
-----------------------------
transactions contemplated by this Agreement is subject to the satisfaction of
the conditions set forth below and/or the delivery of all of the documents,
items, certificates and instruments described below, all of which documents,
items, certificates and instruments must be in form and substance satisfactory
to ZMAX, unless such condition is waived by ZMAX at the Closing. The Closing of
the transactions contemplated by this Agreement will be deemed to mean a waiver
of all conditions to Closing.
(a) Transaction Documents. The Stockholders will have executed this
---------------------
Agreement.
(b) Representations and Warranties. The representations and
------------------------------
warranties of the Stockholders set forth in this Agreement will be true, correct
and complete in all respects as of the Closing Date, as though made on and as of
the Closing Date.
(c) No Action. No suit, action, or proceeding will be pending or
----------
threatened before any governmental or regulatory authority wherein an
unfavorable judgment, order,
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<PAGE>
decree, stipulation, injunction or charge would (1) prevent consummation of any
of the transactions contemplated by this Agreement; (2) cause any of the
transactions contemplated by this Agreement to be rescinded following
consummation; or (3) adversely affect the right of CSI to own, operate or
control the business or assets of CSI.
(d) Consents. ZMAX will have received duly executed copies of all
--------
third-party consents and approvals contemplated by this Agreement.
(e) Employment Agreements. Each Stockholder and CSI will have
---------------------
executed an employment agreement in substantially the form of Exhibit C and
---------
Exhibit D, as applicable, attached to this Agreement (the "Employment
- ---------
Agreements").
(f) Stockholders' Agreement. The Stockholders will have executed
-----------------------
the Stockholders Agreement substantially in the form of the Stockholders'
Agreement attached as Exhibit E to this Agreement.
---------
(g) Stock Pledge Agreement. Each Stockholder will have executed
----------------------
the Stock Pledge Agreement (as defined in Section 5.6 of this Agreement).
(h) Escrow Agreements. Each Stockholder will have executed the
-----------------
Earn Out Stock Escrow Agreement and the Closing Escrow Agreement.
(i) No Material Adverse Change. Since October 1, 1996, no CSI
--------------------------
Material Adverse Effect will have occurred.
(j) Opinion of Counsel. The Stockholders will furnish ZMAX with an
------------------
opinion, dated the Closing Date, of counsel satisfactory to ZMAX in form and
substance satisfactory to ZMAX and its counsel.
(k) Resignations. The Stockholders will have delivered to ZMAX the
------------
resignation of James T. McCubbin as director of CSI effective as of the Closing
Date.
(l) Due Diligence Review. ZMAX will be satisfied in all respects
--------------------
with its due diligence investigation of CSI.
2.3 Conditions to Closing of the Stockholders. The Stockholders'
-----------------------------------------
obligation to consummate the transactions contemplated by this Agreement is
subject to the satisfaction of the conditions set forth below and/or the
delivery of all of the documents, items, certificates and instruments described
below, all of which documents, items, certificates and instruments must be in
form and substance satisfactory to the Stockholders, unless such condition is
waived by the Stockholders at the Closing. The Closing of the transactions
contemplated by this Agreement will be deemed to mean a waiver of all conditions
to Closing.
-5-
<PAGE>
(a) Transaction Documents. ZMAX will have executed this Agreement.
---------------------
(b) Representations and Warranties. The representations and
------------------------------
warranties of ZMAX set forth in this Agreement will be true, correct and
complete in all respects as of the Closing Date, as though made on and as of the
Closing Date.
(c) No Action. No suit, action, or proceeding will be pending or
----------
threatened before any governmental or regulatory authority wherein an
unfavorable judgment, order, decree, stipulation, injunction or charge would (1)
prevent consummation of any of the transactions contemplated by this Agreement;
(2) cause any of the transactions contemplated by this Agreement to be rescinded
following consummation; or (3) adversely affect the right of ZMAX to own,
operate or control the business or assets of ZMAX.
(d) Employment Agreements. CSI will have executed the Employment
---------------------
Agreements.
(e) Escrow Agreements. ZMAX will have executed the Earn Out Stock
-----------------
Escrow Agreement and the Closing Escrow Agreement.
(f) Opinion of Counsel. ZMAX will furnish the Stockholders with an
------------------
opinion, dated the Closing Date, of its securities counsel, in form and
substance satisfactory to the Stockholders and their counsel.
(g) Copies of Resolutions. ZMAX will have furnished the Stock-
---------------------
holders with certified copies of resolutions duly adopted by the Board of
Directors of ZMAX approving the execution and delivery of this Agreement and the
other documents to be executed and delivered in connection with this Agreement
and consummation of the transactions contemplated hereby and thereby.
(h) Due Diligence Review. The Stockholders will be satisfied in all
--------------------
respects with its due diligence investigation of ZMAX.
2.4 Directors and Officers of CSI. Effective immediately after the
-----------------------------
Closing, any persons other than those listed below who are directors or officers
of CSI on the Closing will immediately resign and ZMAX, as sole shareholder of
CSI, will elect or confirm the election of the following individuals as
directors of CSI (the "New Directors"):
Michael C. Higgins
Michael S. Cannon
Steve L. Komar
Immediately thereafter, the New Directors will appoint or confirm the
appointment of the following individuals as officers of CSI:
-6-
<PAGE>
Michael C. Higgins, President and Assistant Secretary
Michael S. Cannon, Executive Vice President
G.W. Norman Wareham, Chief Financial Officer, Treasurer and Secretary
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS
The Stockholders, jointly and severally, represent and warrant to ZMAX:
3.1 Corporate Organization and Good Standing. CSI is a corporation duly
----------------------------------------
organized, validly existing and in good standing under the laws of Maryland,
with all requisite corporate power and authority to own, operate and lease its
properties and to carry on its business as it is now being conducted. CSI is
qualified or licensed to do business and is in good standing in each
jurisdiction in which the ownership or leasing of property by it or the conduct
of its business requires such licensing or qualification, except where the
failure to be so qualified or licensed or in good standing will not have a CSI
Material Adverse Effect. CSI has no subsidiaries. For purposes of this
Agreement, "CSI Material Adverse Effect" means any materially adverse change in
or effect on the business, operations, properties, assets, liabilities,
financial condition, results of operations or prospects of CSI or its ability to
carry out its obligations under this Agreement, but does not mean any losses,
adverse developments or other conditions suffered by CSI arising from normal
operations or market, political or economic conditions affecting the year 2000
software conversion industry as a whole.
3.2 Due Execution; Enforceability. This Agreement has been, and all other
-----------------------------
documents, agreements and instruments to be executed in connection with the
consummation of the transactions contemplated by this Agreement (collectively,
the "Transaction Documents") will be, duly executed and delivered by the
Stockholders and this Agreement is, and the other Transaction Documents when
executed and delivered by the Stockholders as contemplated by this Agreement
will be, the valid and binding obligation of the Stockholders enforceable in
accordance with their respective terms, except (1) as limited by applicable
bankruptcy, insolvency, reorganization, moratorium, and other laws of general
application affecting enforcement of creditors' rights generally, and (2) as
limited by laws relating to the availability of specific performance, injunctive
relief, or other equitable remedies.
3.3 Capitalization. The entire authorized capital stock and other equity
---------------
securities of CSI consists of 5,000 shares of $1.00 par value stock (the "CSI
Shares") of which 200 shares are issued and outstanding. All of the issued and
outstanding CSI Shares have been duly authorized, are validly issued, were not
issued in violation of any preemptive rights and are fully paid and
nonassessable, are not subject to preemptive rights and were issued in full
compliance with all federal, state and local laws, rules and regulations. Each
Stockholder owns beneficially and of record all of the shares of CSI Shares
issued to such Stockholder as set forth on the CSI share transfer ledger. There
are no outstanding options, warrants, subscriptions, conversion rights, or other
rights, agreements, or commitments obligating CSI to issue any additional CSI
-7-
<PAGE>
Shares, or any other securities convertible into, exchangeable for, or
evidencing the right to subscribe for or acquire from CSI any CSI Shares. There
are no agreements purporting to restrict the transfer of the CSI Shares, no
voting agreements, voting trusts, or other arrangements restricting or affecting
the voting of the CSI Shares.
3.4 Title to CSI Stock. The CSI Stock is lawfully owned by the
------------------
Stockholders in the respective amounts set forth opposite his name on Disclosure
----------
Schedule 3.4, free of preemptive rights and free and clear of all claims, liens,
- ------------
charges, security interest, encumbrances and other restrictions or limitations
of any kind, except as set forth on Disclosure Schedule 3.4, all of which liens
-----------------------
and other restrictions will be terminated as of the Closing Date. Each
Stockholder has the full power, right, and authority to transfer the CSI Stock
held by him pursuant to this Agreement.
3.5 Financial Statements. Attached to this Agreement as Disclosure
--- -------------------- ----------
Schedule 3.5 are true, correct, and complete copies of (i) an unaudited CSI
- ------------
Income Statement for the period ending August 31, 1996 and (ii) an unaudited CSI
Balance Sheet for the period ending August 31, 1996 (the "CSI Reference Balance
Sheet" (collectively, the "CSI Financial Statements"). The CSI Financial
Statements (a) are in accordance with the books and records of CSI and (b)
present fairly the financial condition of CSI as of the respective dates
indicated and the results of operations for such periods. CSI has not received
any advice or notification from its independent certified public accountants
that CSI has used any improper accounting practice that would have the effect of
not reflecting or incorrectly reflecting in the CSI Financial Statements or the
books and records of CSI, any properties, assets, liabilities, revenues, or
expenses. The books, records, and accounts of CSI accurately and fairly
reflect, in reasonable detail, the transactions, assets, and liabilities of CSI.
CSI has not engaged in any transaction, maintained any bank account, or used any
funds of CSI, except for transactions, bank accounts, and funds which have been
and are reflected in the normally maintained books and records of CSI.
3.6 Absence of Certain Changes. Since the date of the CSI Reference
--------------------------
Balance Sheet, except as set forth in Disclosure Schedule 3.6, CSI has not
-----------------------
suffered any CSI Material Adverse Effect.
3.7 Filings, Consents and Approvals. Except for any filings required by
-------------------------------
applicable securities laws and as otherwise set forth on Disclosure Schedule
-------------------
3.7, no filing or registration with, no notice to and no permit, authorization,
- ---
consent, or approval of any public or governmental body or authority or any
other person or entity is necessary for the consummation by the Stockholders of
the transactions contemplated by this Agreement or to enable CSI to continue to
conduct its business after the Closing Date in a manner consistent with that in
which it is presently conducted.
3.8 Noncontravention. Neither the execution, delivery and performance of
----------------
the Transaction Documents, nor the consummation of the transactions contemplated
thereby nor compliance with the provisions thereof, will:
-8-
<PAGE>
(1) Except as set forth in Disclosure Schedule 3.8, conflict with,
-----------------------
result in a violation of, cause a default under (with or without notice,
lapse of time or both) or give rise to a right of termination, amendment,
cancellation or acceleration of any obligation contained in or the loss of
any material benefit under, or result in the creation of any lien, security
interest, charge or encumbrance upon any of the material properties or
assets of CSI under any term, condition or provision of any loan or credit
agreement, note, bond, mortgage, indenture, lease or other agreement,
instrument, permit, license, judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to CSI or its properties or
assets;
(2) Violate any provision of the articles of incorporation or bylaws
of CSI; or
(3) Violate any order, writ, injunction, decree, statute, rule, or
regulation of any court or governmental or regulatory authority applicable
to CSI or any of its properties or assets.
3.9 Litigation. There is no claim, charge, arbitration, grievance,
----------
action, suit, investigation or proceeding by or before any court, arbiter,
administrative agency or other governmental authority now pending or, to the
Stockholders' knowledge, threatened against CSI, or which involves any of the
business, or the properties or assets of CSI that, if adversely resolved or
determined, would have a CSI Material Adverse Effect. There is no reasonable
basis for any claim or action that, based upon the likelihood of its being
asserted and its success if asserted, would have a CSI Material Adverse Effect.
3.10 Material Contracts and Transactions. Disclosure Schedule 3.10
----------------------------------- ------------------------
contains a list of all contracts, agreements, licenses, leases for real property
or personal property, permit, arrangements, commitments, instruments,
understanding or contracts, whether written or oral, express or implied,
contingent, fixed or otherwise, to which CSI is a party (collectively, the "CSI
Contracts"). Except as listed on Disclosure Schedule 3.10, CSI is not a party
------------------------
to any written or oral:
(1) contract for the purchase, sale or lease of any capital assets, or
continuing contracts for the purchase or lease of any materials, supplies,
equipment or services;
(2) agreement to pay commissions or sales representative agreements;
(3) agreement for the employment or consultancy or any person or
entity;
(4) note, debenture, bond, trust agreement, letter of credit
agreement, loan agreement, or other contract or commitment for the
borrowing or lending of money, or agreement or arrangement for a line of
credit or guarantee, pledge, or undertaking of the indebtedness of any
other person;
-9-
<PAGE>
(5) agreement, contract, or commitment for any charitable or political
contribution;
(6) agreement, contract, or commitment limiting or restraining CSI, it
business or any successor thereto from engaging or competing in any manner
or in any business or from hiring any employees, nor, to the Stockholders'
knowledge, is any employee or independent contractor of CSI subject to any
such agreement, contract, or commitment;
(7) material agreement, contract, or commitment not made in the
ordinary course of business;
(8) agreement establishing or providing for any joint venture,
partnership, or similar arrangement between CSI and any other person or
entity; or
(9) power of attorney or similar authority to act for CSI.
Each CSI Contract is in full force and effect, and there exists no material
breach or violation of or default by CSI under any CSI Contract nor, to the
Stockholders' knowledge, by any other party to a CSI Contract, or any event that
with notice or the lapse of time, or both, will create a material breach or
violation thereof or default under any CSI Contract by CSI nor, to the
Stockholders' knowledge, by any other party to a CSI Contract. Except as set
forth on Disclosure Schedule 3.10, the continuation, validity, and effectiveness
------------------------
of each CSI Contract will in no way be affected by the consummation of the
Merger or the other transactions contemplated by this Agreement. Except as
indicated on Disclosure Schedule 3.10, there exists no actual or, to the
------------------------
Stockholders' knowledge, any threatened termination, cancellation, or limitation
of, or any amendment, modification, or change to any CSI Contract, which would
have a CSI Material Adverse Effect. A true, correct and complete copy (and if
oral, a description of material terms) of each CSI Contract, as amended to date,
has been furnished to ZMAX.
3.11 Software. Disclosure Schedule 3.11 contains a list of all computer
-------- ------------------------
software (other than word processing, spreadsheet, and database software of a
type generally available to the public through retail sales) owned, licensed or
used by CSI in the conduct of its business (collectively, the "CSI Software")
------------
and a list of all agreements and contracts giving CSI a license or other rights
to the CSI Software. Such agreements and contracts provide CSI the exclusive
rights to the use of the software programs known as Baseline Inventory Control
(or "BIC"), "IREW" (also know as "CSI Case" or "IMS Case") and the Change of
Century Analysis and Conversion Tool Set (also known as "COCAT") in the
territories listed on Disclosure Schedule 3.11 (the "Territories"), except as
------------------------
otherwise noted on Disclosure Schedule 3.11. No claim is pending or, to the
------------------------
Stockholders' knowledge, threatened, and CSI has not received any notice that
the use by CSI of the CSI Software in their respective Territory infringes upon
or conflicts with or will infringe upon or conflict with any rights claimed
therein by any third party, nor is there any basis known to CSI for such a
claim. No use by CSI of any CSI Software violates and no use by CSI of the CSI
Software as contemplated to correct the "Year 2000 problem" will violate the
terms of any agreement pursuant to which such CSI Software is licensed. No
claim is
-10-
<PAGE>
pending, or, to the Stockholders' knowledge, threatened, which alleges that the
ownership of, rights as licensee to, or other right to use any CSI Software is
invalid or unenforceable by CSI, nor is there any basis known to the
Stockholders for any such claim. Except as shown on Disclosure Schedule 3.11,
------------------------
no royalties or fees are payable by CSI to anyone for use of the CSI Software.
A true, correct, and complete copy of each agreement listed on Disclosure
----------
Schedule 3.11, as such agreement have been amended to date), has been furnished
- -------------
to ZMAX. All such agreements are in full force and effect and, there are no
existing material defaults or events of default, real or claimed, or events
which with or without notice or lapse of time or both would constitute material
defaults under such agreements that would give the non-defaulting party a right
to terminate such agreement or a right to receive any payment pursuant to such
agreement and all of such agreements will in no way be affected by the
consummation of the transactions contemplated by this Agreement.
3.12 Real Property and Real Property Leases. CSI does not own any real
--------------------------------------
property. Disclosure Schedule 3.12 sets forth the name, parties, and date of
------------------------
each lease and sublease of real property that is occupied by CSI ("CSI Leases"),
and the address of each parcel of leased real property and a list of all
amendments to such CSI Leases. Each CSI Lease is in full force and effect and
there is no default asserted thereunder by any party thereto and, to the
Stockholders' knowledge, there are no unasserted defaults (including any events
which with the passage of time or giving of notice or both would constitute a
default). True, correct and complete copies of all the CSI Leases, as amended
to date, have been delivered to ZMAX. CSI has not been notified that the use
and operation of any of the real properties leased by CSI does not conform to
applicable building, zoning, safety, environmental, and other laws, ordinances,
regulations, codes, permits, licenses, and certificates and all restrictions and
conditions affecting title, except where the failure to conform would not have
an CSI Material Adverse Effect.
3.13 Personal Property and Personal Property Leases. Except as set forth
----------------------------------------------
on Disclosure Schedule 3.13, CSI owns or leases the use of, all equipment,
------------------------
furniture, fixtures and other tangible personal property and assets necessary
for the continued operation of the business of CSI as presently conducted and
where the absence of such property and assets would have a CSI Material Adverse
Effect. All of such personal properties are in good operating condition (normal
wear and tear excepted), and are reasonably fit for the purposes for which the
such personal property is presently used.
3.14 Compliance with Law. To the knowledge of the Stockholders, CSI holds
-------------------
and is in compliance with all permits, certificates, licenses, approvals,
registrations and authorizations necessary for the conduct of its business or
the ownership of its properties or assets, except where the failure to hold or
comply could not have a CSI Material Adverse Effect, and all of such permits,
certificates, licenses, approvals, registrations, and authorizations are in full
force and effect. To the knowledge of the Stockholders, CSI is in compliance
with all applicable laws, statutes, ordinances, rules and regulations (including
without limitation those relating to environmental protection, occupational
safety and health, and equal employment practices) and all orders, judgments and
decrees, except where the failure to comply would not have a CSI Material
Adverse Effect.
-11-
<PAGE>
3.15 Taxes. Except as set forth in Disclosure Schedule 3.15, CSI has
----- ------------------------
timely filed with the appropriate taxing authorities all returns required to be
filed on or prior to the date hereof in respect of all taxes of CSI, and has
paid all such taxes, including interest, penalties, and additions in connection
therewith shown to have become due on such returns or for which a notice of
assessment or demand for payment has been received. All such returns have been
prepared in accordance with all applicable laws and requirements. Any accruals
for such taxes reflected in the CSI Reference Balance Sheet are sufficient to
satisfy the accrued liability for such taxes as of the date of the CSI Reference
Balance Sheet. No material tax issues have been raised by the Internal Revenue
Service in connection with any of the tax returns referred to above, and no
waivers of statutes of limitations or extensions of time within which to file
any tax return or with respect to a tax assessment or deficiency have been given
or requested with respect to CSI.
3.16 Labor Relations. None of CSI's employees is represented by any union
---------------
or other labor organization. There is no unfair labor practice charge or other
labor related grievance pending or, to the Stockholders' knowledge, threatened
against CSI that might have a CSI Material Adverse Effect.
3.17 Pension and Employee Benefit Plans and Compensation. CSI maintains no
---------------------------------------------------
employee pension benefit plans (as defined in Section 3(2) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")), welfare benefit
plans (as defined in Section 3(1) of ERISA), bonus, stock purchase, stock
ownership, stock option, deferred compensation, incentive, severance,
termination or other compensation plan or arrangement, and other material
employee fringe benefit plans. No salary or other payment due to the
Stockholder remains unpaid by CSI and the Stockholders have been completely paid
for past services rendered to CSI, other than current unpaid salary and current
business expenses not to exceed $50,000 in the aggregate to be paid or
reimbursed by CSI in the ordinary course of business.
3.18 Other Intellectual Property. CSI has no registered or unregistered,
---------------------------
foreign or United States trademarks, trade names, trade styles, and service
marks and copyrights; trade secrets or know-how, except as listed on Disclosure
----------
Schedule 3.18.
- -------------
3.19 Insurance. Set forth in Disclosure Schedule 3.19 is a list of all
--------- ------------------------
insurance policies that relate to CSI's business. The coverage under each such
policy is in full force and effect, and no notice of cancellation or nonrenewal
with respect to, or disallowance of any claim under, any such policy has been
received by CSI. The Stockholders have no knowledge of any facts or the
occurrence of any event that reasonably might form the basis of any claim
against CSI relating to its business or operations or any of its assets or
properties covered by any of such policy that may materially increase the
insurance premiums payable under any such policy
3.20 Affiliate Transactions. Except as disclosed in Disclosure Schedule
---------------------- -------------------
3.20, no officer, director, affiliate of CSI provides any assets, services or
- ----
facilities used or held for use in connection with CSI's business and CSI does
not provide or cause to be provided any assets, services or facilities to any
such officer, director, or affiliate.
-12-
<PAGE>
3.21 Correctness of Representations. No representation or warranty of CSI
------------------------------
in this Agreement or in any exhibit, certificate, or schedule attached to this
Agreement or furnished pursuant to this Agreement contains, or at the Closing
Date will contain, any untrue statement of fact or omits, or at the Closing Time
will omit, to state any material fact necessary in order to make the statements
contained therein not misleading, and all such statements, representations,
warranties, exhibits, certificates, and schedules shall be true and complete in
all material respects on and as of the Closing Time as though made on that date.
SECTION 4
REPRESENTATIONS AND WARRANTIES
OF ZMAX AND ZMAX ACQUISITION
ZMAX represents and warrants to the Stockholders as follows:
4.1 Organization and Good Standing. ZMAX is a corporation duly organized,
------------------------------
validly existing and in good standing under the laws of Nevada and has all
requisite corporate power and authority to own, lease and operate its properties
and to carry on its business as now being conducted. ZMAX has no validly
existing subsidiaries. ZMAX is a development stage company.
4.2 Capital Structure. The entire authorized capital stock and other
-----------------
equity securities of ZMAX consists of 95,000,000 shares of $0.001 par value
common stock of which 3,800,079 shares are issued and outstanding and
10,000,000 shares of $0.001 par value preferred stock of which no shares are
issued and outstanding. All of the issued and outstanding shares of ZMAX Stock
have been duly authorized, are validly issued fully paid and nonassessable and,
are not subject to preemptive rights. Disclosure Schedule 4.2 sets forth the
percentage holdings of the Stockholders in ZMAX after giving effect to the
transactions contemplated by this Agreement and certain proposed issuances of
ZMAX Stock.
4.3 Authority. ZMAX has all requisite corporate power and authority to
---------
enter into this Agreement and the Transaction Documents to which it is a party
and to perform its obligations thereunder and to consummate the transactions
contemplated thereby. The execution and delivery of this Agreement and each of
the Transaction Documents to which it is a party by ZMAX and the consummation by
ZMAX of the transactions contemplated thereby, have been duly authorized by the
board of directors of ZMAX and no other corporate proceedings on the part of
ZMAX are necessary to authorize such documents or to consummate the transactions
contemplated thereby. This Agreement has been, and all the other Transaction
Documents to which it is a party when executed and delivered by ZMAX as
contemplated by this Agreement will be, duly executed and delivered by ZMAX and
this Agreement is, and the other Transaction Documents when executed and
delivered by ZMAX and ZMAX Acquisition as contemplated hereby will be, the valid
and binding obligation of ZMAX enforceable in accordance with their respective
terms, except (1) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium, and other laws of general application affecting
enforcement of creditors' rights
-13-
<PAGE>
generally, and (2) as limited by laws relating to the availability of specific
performance, injunctive relief, or other equitable remedies.
4.4 Financial Statements. Attached to this Agreement as Disclosure
-------------------- ----------
Schedule 4.4 are true, correct, and complete copies of (i) unaudited ZMAX
- ------------
Balance Sheet for the period ending October 15, 1996 and years ending December
31, 1995, 1994, 1993 and 1992; (ii) unaudited ZMAX Statement of Operations for
the period ending October 15, 1996 and years ending December 31, 1995, 1994,
1993 and 1992 and April 24, 1986 (date of inception) to October 15, 1996; (iii)
unaudited ZMAX Statements of Stockholders' Equity (Deficiency) for the period
ending October 15, 1996 and years ending December 31, 1995, 1994, 1993 and 1992
and April 24, 1986 (date of inception) to October 15, 1996; (iv) unaudited ZMAX
Statements of Cash Flow for the period ending October 15, 1996 and years ending
December 31, 1995, 1994, 1993 and 1992 and April 24, 1986 (date of inception) to
October 15, 1996; (v) audited Mediterranean Oil Corporation (formerly Oryx Gold
Corporation, and now ZMAX and referred to in this Section as "MOC") Balance
Sheet for the years ending December 31, 1995, 1994, 1993 and 1992; (vi) an
audited MOC Statement of Operations for years ending December 31, 1995, 1994,
1993 and 1992 and April 24, 1986 (date of inception) to December 31, 1995; (vii)
audited MOC Statements of Stockholders' Equity (Deficiency) for the years ending
december 31, 1995, 1994, 1993 and 1992 and April 24, 1986 (date of inception) to
December 31, 1995; (viii) unaudited MOC Statements of Cash Flow for the years
ending December 31, 1995, 1994, 1993 and 1992 and April 24, 1986 (date of
inception) to December 31, 1995 (collectively, the "ZMAX Financial Statements").
The ZMAX Financial Statements (a) are in accordance with the books and records
of ZMAX and (b) present fairly the financial condition of ZMAX as of the
respective dates indicated and the results of operations for such periods. ZMAX
has not received any advice or notification from its independent certified
public accountants that ZMAX has used any improper accounting practice that
would have the effect of not reflecting or incorrectly reflecting in the ZMAX
Financial Statements or the books and records of ZMAX, any properties, assets,
liabilities, revenues, or expenses. The books, records, and accounts of ZMAX
accurately and fairly reflect, in reasonable detail, the transactions, assets,
and liabilities of ZMAX. ZMAX has not engaged in any transaction, maintained
any bank account, or used any funds of ZMAX, except for transactions, bank
accounts, and funds which have been and are reflected in the normally maintained
books and records of ZMAX.
4.5 Noncontravention. Neither the execution, delivery and performance of
----------------
the Transaction Documents, nor the consummation of the transactions contemplated
thereby nor compliance with the provisions thereof, will:
(1) Conflict with, result in a violation of, cause a default under
(with or without notice, lapse of time or both) or give rise to a right of
termination, amendment, cancellation or acceleration of any obligation
contained in or the loss of any material benefit under, or result in the
creation of any lien, security interest, charge or encumbrance upon any of
the material properties or assets of ZMAX under any term, -condition or
provision of any loan or credit agreement, note, bond, mortgage, indenture,
lease or other agreement, instrument, permit, license, judgment, order,
decree, statute,
-14-
<PAGE>
law, ordinance, rule or regulation applicable to ZMAX or their respective
properties or assets;
(2) Violate any provision of the articles or certificate of
incorporation or by-laws of ZMAX; or
(3) Violate any order, writ, injunction, decree, statute, rule, or
regulation of any court or governmental or regulatory authority applicable
to ZMAX or any of their properties or assets.
4.6 Litigation. There is no claim, charge, arbitration, grievance,
----------
action, suit, investigation or proceeding by or before any court, arbiter,
administrative agency or other governmental authority now pending or, to ZMAX's
knowledge, threatened against ZMAX, or which involves any of the business, or
the properties or assets of ZMAX that, if adversely resolved or determined,
would have a material adverse effect on ZMAX. There is no reasonable basis for
any claim or action that, based upon the likelihood of its being asserted and
its success if asserted, would have a material adverse effect.
4.7 Filings, Consents and Approvals. Except for any filings required by
-------------------------------
applicable securities laws, no filing or registration with, no notice to and no
permit, authorization, consent, or approval of any public or governmental body
or authority or other person or entity is necessary for the consummation by ZMAX
of the transactions contemplated by this Agreement or to enable ZMAX to continue
to conduct its business after the Closing Date in a manner which is consistent
with that in which it is presently conducted.
SECTION 5
SURVIVAL AND INDEMNIFICATION
5.1 Survival of Representations and Warranties. The representations,
------------------------------------------
warranties and covenants made by the parties shall survive the Closing for a
period of 9 months from the Closing Date; provided, however, that
representations and warranties relating to taxes will survive for a period of
five years after the Closing Time or until the expiration date of the statute of
limitations applicable to such tax liability or the final determination of any
such tax liability, including the final administrative or judicial determination
thereof, whichever occurs first.
5.2 Indemnification by Stockholders. The Stockholders, jointly and
-------------------------------
severally, agree to indemnify ZMAX and CSI, and their respective officers,
directors, shareholders, employees, agents and affiliates (other than the
Stockholders themselves) in respect of, and hold each of them harmless from and
against, any and all damages, fines, fees, penalties, deficiencies, losses and
expenses (including without limitation interest, court costs, fees of attorneys,
accountants and other experts or other expenses of litigation or other
proceedings or of any claim, default or assessment) suffered, incurred or
sustained by any of them or to which any of them becomes
-15-
<PAGE>
subject, resulting from, arising out of or relating to any misrepresentation,
breach of warranty or nonfulfillment of or failure to perform any covenant or
agreement on the part of the Stockholders contained in this Agreement.
5.3 Indemnification by ZMAX. ZMAX agrees to indemnify the Stockholders in
-----------------------
respect of, and hold each of them harmless from and against, any and all
damages, fines, fees, penalties, deficiencies, losses and expenses (including
without limitation interest, court costs, fees of attorneys, accountants and
other experts or other expenses of litigation or other proceedings or of any
claim, default or assessment) suffered, incurred or sustained by any of them or
to which any of them becomes subject, resulting from, arising out of or relating
to any misrepresentation, breach of warranty or nonfulfillment of or failure to
perform any covenant or agreement on the part of ZMAX contained in this
Agreement.
5.4 Procedures for Indemnification for Third Party Claims. Whenever
-----------------------------------------------------
indemnification is sought under this Section 5 in connection with a claim or
demand brought by a third party, the party seeking indemnification (the
"Indemnitee") will promptly notify the party from whom indemnification is sought
(the "Indemnitor"), specifying the nature of such claims, the amount or
estimated amount of such claim and attaching copies of all relevant information
concerning the underlying claim of liability. Within ten days of receipt of
such notice, the Indemnitor will notify the Indemnitee promptly whether it
disputes its indemnification obligation. If the indemnification obligation is
not so disputed, the Indemnitor, at the option of the Indemnitee, will, at the
Indemnitor's cost and expense, defend any such claim. If the Indemnitee so
elects for the Indemnitor to defend any claim, the Indemnitor will have full
control over the conduct of such proceeding, although the Indemnitee will have
the right to retain legal counsel at its own expense and will have the right to
approve any settlement of any claim, provided that such approval may not be
withheld unreasonably. If the Indemnitee does not elect for the Indemnitor to
assume the defense of such claim, the Indemnitee will have the right to defend
the claim at the reasonable cost and expense of the Indemnitor. The Indemnitor
will not be obligated to indemnify the Indemnitee with respect to such third
party claim to the extent that the Indemnitor's ability to defend has been
irreparably prejudiced by the failure or delay of the Indemnitee to give
Indemnitor the notice required by this Section 6.3. Any dispute of an
indemnification obligation under this Agreement may be resolved by litigation in
a court of competent jurisdiction.
5.5 Procedures for Indemnification for Non-Third Party Claims. If any
---------------------------------------------------------
Indemnitee has a claim under Section 5 against any Indemnitor that does not
involve a third party claim as described in Section 5.4 above, the Indemnitee
will promptly notify the Indemnitor of such claim, specifying the nature of such
claim and the amount of any loss incurred by the Indemnitee. The failure by any
Indemnitee to give such notice will not impair such party's rights under this
Agreement except to the extent that the Indemnitor demonstrates that it has been
irreparably prejudiced thereby. If the Indemnitor notifies the Indemnitee that
it does not dispute the claim described in such notice or fails to notify the
Indemnitee within 30 days its receipt of such notice, the loss in the amount
specified in the notice will be conclusively deemed a liability of the
Indemnitor under Section 5 and the Indemnitor will pay the amount of
-16-
<PAGE>
such loss to the Indemnitee on demand. If the Indemnitor has timely disputed
its liability with respect to such claim, the Indemnitor and the Indemnitee will
proceed in good faith to negotiate a resolution of such dispute, and if not
resolved through negotiations within 60 days after the Indemnitors receipt of
the initial claim notice, such dispute may be resolved by litigation in a court
of competent jurisdiction.
5.6 Security for Indemnification. As security for their indemnification
----------------------------
obligations under this Section 5, the Stockholders, effective as of the Closing
Date, agree to pledge their ZMAX Stock in favor of ZMAX by executing the stock
pledge agreement in substantially the form of the Stock Pledge and Security
Agreement attached as Exhibit F to this Agreement (the "Stock Pledge
---------
Agreement").
5.7 Indemnification for Fees and Commissions. Each party to this
----------------------------------------
Agreement is responsible for paying any broker, finder or investment banker that
is entitled to receive any brokerage, finder's or other fee or commission in
connection with the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of such party and indemnifies and holds
harmless the other parties from any such fees or commissions.
SECTION 6
MISCELLANEOUS PROVISIONS
6.1 Worldwide Software Rights. The Stockholders will use their best
-------------------------
efforts to obtain for CSI an option to purchase the balance of the worldwide
rights to the COCAT software.
6.2 Actions by Stockholders. Any action or remedy of the Stockholders
-----------------------
under this Agreement, including without limitation, a request for arbitration or
indemnification, must be exercised jointly by the Stockholders.
6.3 Effectiveness of Representations. Each party is entitled to rely on
--------------------------------
the representations, warranties and agreements of each of the other parties and
all such representation, warranties and agreement will be effective regardless
of any investigation that any party has undertaken or failed to undertake.
[SIGNATURES ON FOLLOWING PAGE]
-17-
<PAGE>
EXECUTED on November 6, 1996.
ZMAX CORPORATION
By: /s/ G.W. Norman Wareham
-----------------------------------------
Name: G.W. Norman Wareham
Title: Vice President
/s/ Michael S. Cannon
- ----------------------------------------------
Michael S. Cannon
/s/ Michael C. Higgins
- ----------------------------------------------
Michael C. Higgins
-18-
<PAGE>
SCHEDULE OF EXHIBITS TO STOCK PURCHASE AGREEMENT
------------------------------------------------
Exhibit A -- Earn Out Agreement [filed as Exhibit 10.12]
Exhibit B -- Closing Escrow Agreement [immaterial]
Exhibit C -- Higgins Employment Agreement [filed as Exhibit 10.5]
Exhibit D -- Cannon Employment Agreement [immaterial, however, certain
provisions regarding restrictive covenants are included as
Exhibit 2 to Exhibit 10.8]
Exhibit E -- Stock Pledge Agreement [filed as Exhibit 10.14]
-19-
<PAGE>
Exhibit 3.1
ARTICLES OF INCORPORATION
-------------------------
OF
--
ZMAX CORPORATION
----------------
[as amended]
The undersigned, to form a Nevada corporation, CERTIFIES THAT:
I. NAME: The name of the corporation is:
----
ZMAX CORPORATION.
II. PRINCIPAL OFFICE: The location of the principal office is this
----------------
corporation within the State of Nevada is 6121 Lakeside Drive, Suite 250, Reno,
Nevada; this corporation may maintain an office or offices in such other place
within or without the State of Nevada as may be from time to time designated by
the Board of Directors or by the By-Laws of the corporation; and this
corporation may conduct all corporation business of every kind or nature,
including the holding of any meetings of Directors of Stockholders, within the
State of Nevada, as well a without the State of Nevada.
III. PURPOSE: The purpose for which this corporation is formed is: To
-------
engage in any lawful activity.
IV. AUTHORIZATION OF CAPITAL STOCK: The total number of shares of all
------------------------------
classes of capital stock which this Corporation shall have authority to issue is
ONE HUNDRED AND FIVE MILLION (105,000,000) shares of par value stock; TEN
MILLION (10,000,000) shares of $0.01 (One-Tenth Cent) par value to be preferred
shares and NINETY-FIVE MILLION (95,000,000) shares of $0.001 (One-Tenth Cent)
par value to be common shares. All or any part of the shares of the preferred
or common stock may be
<PAGE>
issued by the Corporation from time to time and for such consideration as may be
determined and fixed by the Board of Directors, as provided by law, with due
regard to the interest of the existing shareholders.
Five million of the preferred shares authorized herein are hereby
designated "Series A Preferred Shares." Each Series A Preferred Share shall
have the same voting powers, preferences, limitations, restrictions and relative
rights as a common share authorized herein, except that each Series A Preferred
Share shall be convertible into four common shares of the Corporation at any
time at the option of the holder thereof.
The Board of Directors is authorized, subject to limitations prescribed by
law and the provisions of this Section IV, to provide for the designation into
series of the shares of preferred stock not designated Series A Preferred Shares
by filing a certificate pursuant to the applicable law of the State of Nevada,
to establish from time to time the number of shares to be included in each such
series, and to fix the designations, powers, preferences and rights of the
shares of each such series and the qualifications, limitations or restrictions
thereof.
The authority of the Board with respect to each such series shall include,
but not be limited to, determination of the following:
(a) The number of shares constituting that series and the distinctive
designation of that series;
(b) The dividend rate, if any, on the shares of that series, whether
dividends shall be cumulative, and, if so, from which date or dates, and
the relative rights of priority, if any, of payment of dividends on shares
of that series;
2
<PAGE>
(c) Whether that series shall have voting rights, in addition to the
voting rights provided by law, and, if so, the terms of such voting rights;
(d) Whether that series shall have conversion privileges, and, if so,
the terms and conditions of such conversion, including provision for
adjustment of the conversion rate in such events as the Board of Directors
shall determine;
(e) Whether or not the shares of that series shall be redeemable, and,
if so, the terms and conditions of such redemption, including the date or
dates upon or after which the shall be redeemable, and the amount per share
payable in case of redemption, which amount may vary under different
conditions and at different redemption dates;
(f) Whether that series shall have a sinking fund for the redemption
or purchase of shares of that series, and, if so, the terms and amount of
such sinking fund;
(g) The rights of the shares of that series in the event of voluntary
or involuntary liquidation, dissolution or winding up of the Corporation,
and the relative rights of priority, if any, of payment of shares of that
series;
(h) Any other relative rights, preferences and limitations of that
series, Section
3
<PAGE>
V. INCORPORATOR: The name and post office address of the incorporator
------------
signing these Articles of Incorporation is as follows:
<TABLE>
<CAPTION>
NAME POST OFFICE ADDRESS
---- -------------------
<S> <C>
Robbin Dunn 6121 Lakeside Drive
Suite 250
Reno, Nevada 89511
</TABLE>
VI. DIRECTORS: The governing board of this corporation shall be known as
---------
directors, and the first board shall be three in number.
So long as all of the shares of this corporation are owned beneficially and
of record by either one or two shareholders, the number of directors may be
fewer than three, but not fewer than the number of shareholders. Otherwise, the
number of directors shall not be fewer than three.
Subject to the foregoing limitations, the number of directors may, at any
time or times, be increased or decreased by a duly adopted amendment to these
Articles of Incorporation, or in such manner as provided in the By-Laws of this
corporation.
The name and post office address of the directors constituting the first
Board of Directors are as follows:
<TABLE>
<CAPTION>
NAME POST OFFICE ADDRESS
---- -------------------
<S> <C>
Andrew Pierce 1057 E. 9th South
Salt Lake City, UT 84105
Phyllis Bell 1489 N. 350 West
Bountiful, Utah 84010
Boyd Tangren 1057 E. 9th South
Salt Lake City, UT 84105
</TABLE>
4
<PAGE>
VII. STOCK NON-ASSESSABLE: The capital stock or the holders thereof, after
--------------------
the amount of the subscription price has been paid in, shall not be subject to
any assessment whatsoever to pay the debts of the corporation.
VIII. TERM OF EXPERIENCE. This corporation shall have perpetual
------------------
existence.
IX. CUMULATIVE VOTING. No cumulative voting shall be permitted in the
-----------------
election of directors.
X. PREEMPTIVE RIGHTS: Stockholders shall not be entitled to preemptive
-----------------
rights.
XI. LIMITATION OF LIABILITY OF OFFICERS AND DIRECTORS: Any director or
-------------------------------------------------
officer of the Corporation shall not be personally liable to the Corporation or
its stockholders for damages for breach of fiduciary duty as a director or
officer except for liability:
(i) arising from acts or omissions which involve intentional
misconduct, fraud or a knowing violation of law; or
(ii) arising from the payment of distributions in violation of Nevada
------
Revised Statutes, Section 78.300.
- ----------------
If the Nevada General Corporation Law is amended after approval by the
stockholders of this section further eliminating or limiting the personal
liability of officers or directors, then the liability of an officer or a
director of the Corporation shall be eliminated to the fullest extent permitted
by the Nevada General Corporation Law, as so amended.
5
<PAGE>
Any repeal or modification of the foregoing paragraph by the stockholders
of the Corporation shall not adversely affect any right or protection of an
officer or a director of the Corporation existing at the time of such repeal or
modification.
XII. INDEMNIFICATION
---------------
(a) Right to Indemnification. Each person who was or is made a party or is
------------------------
threatened to be made a party to or is otherwise involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he or she is or was a
director, officer or employee of the Corporation or is or was serving at the
request of the Corporation as a director, officer, employee or agent of another
corporation or of a partnership, joint venture, trust or other enterprise,
including service with respect to employee benefit plans (hereinafter an
"indemnitee"), whether the basis of such proceeding is alleged action in an
official capacity as a director, officer, employee or agent or in any other
capacity while serving as a director, officer, employee or agent, shall be
indemnified and held harmless by the Corporation to the fullest extent
authorized by the Nevada General Corporation Law, as the same exists or may
hereafter be amended (but, in the case of any such amendment, only to the extent
that such amendment permits the Corporation to provide broader indemnification
rights that such law permitted the Corporation to provide prior to such
amendment), against all expense, liability and loss (including attorneys' fees,
judgments, fines, ERISA excise taxes or penalties and amounts paid in
settlement) reasonably incurred or suffered by such indemnitee in connection
therewith and such indemnification shall continue as to an indemnitee who has
ceased to be a director, officer, employee or agent and shall inure to the
benefit of the indemnitee's heirs,
6
<PAGE>
executors and administrators; provided, however, that, except as provided in
paragraph (b) hereof with respect to proceedings to enforce rights to
indemnification, the Corporation shall indemnify any such indemnitee in
connection with a proceeding (or part thereof) initiated by such indemnitee only
if such proceeding (or part thereof) was authorized by the Board of Directors of
the Corporation. The right to indemnification conferred in this section shall
be a contract right and shall include the right to be paid by the Corporation
the expenses incurred in defending any such proceeding in advance of its final
disposition (hereinafter an "advancement of expenses"); provided, however, that,
if the Nevada General Corporation Law requires, an advancement of expenses
incurred by an indemnitee in his or her capacity as a director or officer (and
not in any other capacity in which service was or is rendered by such
indemnitee, including, without limitation, service to an employee benefit plan)
shall be made only upon delivery to the Corporation of an undertaking, by or on
behalf of such indemnitee, to repay all amounts so advanced if it shall
ultimately be determined by final judicial decision from which there is no
further right to appeal that such indemnitee is not entitled to be indemnified
for such expenses under this section or otherwise (hereinafter an
"undertaking").
(b) Right of Indemnitee to Bring Suit. If a claim under paragraph (a) of
---------------------------------
this section is not paid in full by the Corporation within sixty days after a
written claim has been received by the Corporation, except in the case of a
claim for an advancement of expenses, in which case the applicable period shall
be twenty days, the indemnitee may at any time thereafter bring suit against the
Corporation to recover the unpaid amount of the claim. If successful in whole
or in part in any such suit or in a suit brought by the Corporation to
7
<PAGE>
recover an advancement of expenses pursuant to the terms of an undertaking, the
indemnitee shall be entitled to be paid also the expense of prosecuting or
defending such sit. In (i) any suit brought by the indemnitee to enforce a
right to indemnification hereunder (but not in a suit brought by the indemnitee
to enforce a right to an advancement of expenses) it shall be a defense that,
and (ii) any suit by the Corporation to recover an advancement of expenses
pursuant to the terms of an undertaking the Corporation shall be entitled to
recover such expense upon a final adjudication that, the indemnitee has not met
the applicable standard of conduct set forth in the Nevada General Corporation
Law. Neither the failure of the Corporation (including its Board of Directors,
independent legal counsel, or its stockholders) to have made a determination
prior to the commencement of such suit that indemnification of the indemnitee is
proper in the circumstances because the indemnitee has met the applicable
standard of conduct set forth in the Nevada General Corporation Law, nor an
actual determination by the Corporation (including its Board of Directors,
independent legal counsel, or its stockholders) that the indemnitee has not met
such applicable standard of conduct, shall create a presumption that the
indemnitee has not met the applicable standard of conduct or, in the case of
such a suit brought by the indemnitee, be a defense to such suit. In any suit
brought by the indemnitee to enforce a right hereunder, or by the Corporation to
recover an advancement of expenses pursuant to the terms of an undertaking, the
burden of proving that the indemnitee is not entitled to be indemnified or to
such advancement of expenses under this section or otherwise shall be on the
Corporation.
(c) Non-Exclusivity of Rights. The rights to indemnification and to the
-------------------------
advancement of expenses conferred in this section shall not be exclusive of any
other rights
8
<PAGE>
which any person may have or hereafter acquire under any statute, bylaw,
agreement, vote of stockholders or disinterested directors, the Articles of
Incorporation or otherwise.
(d) Insurance. The Corporation may maintain insurance, at its expense, to
---------
protect itself and any director, officer, employee or agent of the Corporation
or another corporation, partnership, joint venture, trust or other enterprise
against any expense, liability or loss, whether or not the Corporation would
have the power to indemnify such person against such expense, liability or loss
under the Nevada General Corporation Law.
(e) Indemnification of Agents of the Corporation. The Corporation may, to
--------------------------------------------
the extent authorized from time to time by the Board of Directors, grant rights
to indemnification and to the advancement of expenses, to any agent of the
Corporation to the fullest extent of the provisions of this section with respect
to the indemnification and advancement of expenses of directors, officers and
employees of the Corporation.
9
<PAGE>
Exhibit 3.2
BY-LAWS
-------
OF
--
ZMAX CORPORAITON
----------------
[as amended]
ARTICLE I
Name of Corporation
-------------------
Section 1: This corporation shall be known as ZMAX Corporation.
- ---------
ARTICLE II
Offices
-------
Section 1: The principal office of the corporation will be located at
- ---------
6121 Lakeside Drive, Suite 250, Reno, Nevada. The corporation may maintain such
other offices as the Board of Directors may designate from time to time.
ARTICLE III
Stockholders
------------
Section 1: The annual meeting of the stockholders shall be held in July of each
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year, at a date and time to be specified by the Board of Directors. Said
meeting shall be for the purpose of electing directors for the ensuing year and
for the transaction of such other directors as may come before the meeting. If
the election of directors shall not be held on the day designated for the annual
meeting of the stockholders, or at any adjournment thereof, the Board of
Directors shall cause the election to be held at a special meeting of the
stockholders as soon thereafter as possible.
Section 2: Special meetings of the stockholders, for any purpose or purposes,
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unless otherwise prescribed by Statute, may be called by the President or by the
Board of Directors and shall be called by the President at the request of the
holders of not less than one-tenth of all the outstanding shares of the
corporation entitled to vote at the meeting.
Section 3: The Board of Directors may designate any place within or without the
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State of Nevada as the site for any annual or special stockholders meeting. A
waiver of notice signed
<PAGE>
by all stockholders entitled to vote at a meeting may designate any place,
either within or without the State of Nevada, as the site for any meeting
hereinabove authorized. If no designation is made, the place of the meeting
shall be at the principal office of the corporation in the State of Nevada.
Section 4: Written or printed notice stating the site, date and time of the
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meeting and, in case of a special meeting, the purpose or purposes for which the
meeting is called, shall be delivered not less than ten (10) days nor more than
sixty (60) days before the date of the meeting, either personally or by mail, by
or at the direction and over the signature of the President, or the Secretary,
or the officer or person calling the meeting, to each stockholder of record
entitled to vote at such meeting. If mailed, such notice shall be deemed to be
delivered when deposited in the United States mail, addressed to the stockholder
at his address as it appears on the stock transfer books of the corporation,
with postage thereon prepaid.
Section 5: For the purpose of determining stockholders entitled to notice of or
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to vote at any meeting of stockholders, or any adjournment thereof, or
stockholders entitled to receive payment of any dividend, or in order to make a
determination of stockholders for any other proper purpose, the Board of
Directors of the corporation may provide that the stock transfer books shall be
closed for a stated period, not to exceed twenty (20) days. In lieu of closing
the stock transfer books, the Board of Directors may fix in advance a date as
the record date for any such determination of stockholders, such date in any
case to be not more than sixty (60) days and, in case of a meeting of
stockholders, not less than fifteen (15) days prior to the date which the
particular action requiring such determination of stockholders is to be taken.
If the stock transfer books are not closed and no record dates fixed for the
determination of stockholders entitled to notice of or to vote, or entitled to
receive payment of a dividend, the date on which notice of the meeting is mailed
or the date on which the resolution of the Board of Directors declaring such
dividend is adopted, as the case may be, shall be the record date for such
determination of stockholders. When a determination of stockholders entitled to
vote at any meeting of stockholders has been made as provided in this section,
such determination shall apply to any adjournment thereof, except where the
determination has been made through the closing of the stock transfer books and
the stated period of closing has expired.
Section 6: The officer or agent having charge of the stock transfer books for
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share of the corporation shall make, at least ten (10) days before each meeting
of stockholders, a complete list of the stockholders entitled to vote at such
meeting, or any adjournment thereof, arranged in alphabetical order, with the
address of, and the number of shares held by, each, which list, for a period of
ten (10) days prior to such meeting, shall be kept on file at the principal
office of the corporation and shall be subject to the inspection of any
stockholder during the meeting.
Section 7: A majority of the outstanding shares of the corporation entitled to
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vote, represented in person or by proxy, shall constitute a quorum at a meeting
of stockholders. If
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less than a majority of the outstanding shares are represented at a meeting, a
majority of the shares so represented may adjourn the meeting from time to time
without further notice. At such adjourned meeting at which a quorum shall be
present or represented, any business may be transacted which might have been
transacted at the meeting as originally notified. The stockholders present at a
duly organized meeting may continue to transact business until adjournment,
notwithstanding the withdrawal of enough stockholders to leave less than a
quorum.
Section 8: At all meetings of stockholders, a stockholder may vote by proxy
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which shall be executed in writing by the stockholder or by his duly authorized
attorney in fact. Such proxy shall be filed with the Secretary of the
corporation before or at the time of the meeting. No proxy shall be valid after
six (6) months from the date of its execution, unless otherwise provided in the
proxy or coupled with an interest.
Section 9: Each outstanding share otherwise entitled to vote shall be entitled
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to one (1) vote upon each matter submitted to a vote at a meeting of
stockholders. A majority vote of those shares present and voting at a duly
organized meeting shall suffice to defeat or enact any proposal unless the
Statutes of the State of Nevada require a greater-than-majority vote, in which
event the higher vote shall be required for the action to constitute the action
of the corporation.
Section 10: Shares hold by an administrator, executor, guardian or conservator
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may be voted by him, either in person or by proxy, without the transfer of such
shares into his name. Shares standing in the name of a trustee may be voted by
him, either in person or by proxy, but no trustee shall be entitled to vote
shares held by him without transfer of such shares into his name.
Shares standing in the name of a receiver may be voted by such receiver, and
shares held by or under the control of a receiver may be voted by such receiver
without the transfer thereof into his name if authority to do so be contained in
an appropriate order of the Court by which such receiver was appointed.
A stockholder whose shares are pledged shall be entitled to vote such shares
until the shares are transferred into the name of the pledgee, and thereafter
the pledgee shall be entitled to vote the shares so transferred.
Shares of its own stock belonging to the corporation or held by it in a
fiduciary capacity shall not be voted, directly or indirectly, at any meeting,
and shall not be counted in determining the total number of outstanding shares
at any given time.
Section 11: An action required to be taken at a meeting of the stockholders, or
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any other action which may be taken at a meeting of the stockholders, may be
taken without a meeting, if a consent in writing, setting forth the action so
taken, shall be signed by a majority of the stockholders entitled to vote with
respect to the subject matter thereof, unless a greater-than-
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<PAGE>
majority vote would be required at a duly organized meeting, in which event said
greater-than-majority stockholder approval must be obtained. Such consent shall
be filed with the Minutes of Proceedings.
Section 12: The following order of business shall be observed at all meetings
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of the stockholders, so far as practicable:
(a) Calling the roll;
(b) Reading, correcting and approving of minutes of previous meeting;
(c) Reports of officers;
(d) Reports of Committees;
(e) Election of Directors;
(f) Unfinished business;
(g) Now business; and
(h) Adjournment.
ARTICLE IV
Board of Directors
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Section 1: The business and affairs of the corporation shall be managed by its
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Board of Directors.
Section 2: The Board of Directors shall consist of not less than three (3) or
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more than eleven (11) members with the specific number to be set from time to
time by the affirmative vote of a majority of the members of the Board of
Directors. The directors shall hold office until the next annual meeting of
stockholders and until their successor shall have been elected and qualified.
Directors need not be residents of the State of Nevada or stockholders of the
corporation.
Section 3: Directors shall be elected at an annual or special stockholders'
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meeting by secret ballot of those stockholders present and entitled to vote, a
plurality of the vote being cast being required to elect. Each stockholder
shall be entitled to one (1) vote for each share of stock owned. If there is
but one (1) nominee for any office, it shall be in order to move that the
Secretary cast the elective ballot to elect the nominee.
4
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Section 4: A regular meeting of the Board of Directors shall be held without
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notice, other than this By-Law immediately after, and at the same place as, the
annual meeting of stockholders. The Board of Directors may provide, by
resolution, the day, time and place for the holding of additional regular
meetings without other notice than such resolution. The Secretary of the
corporation shall serve as Secretary for the Board of Directors and shall issue
notices for all meetings as required by the By-Laws; shall keep a record of the
minutes of the proceedings of the meetings of directors; and shall perform such
other duties as may be properly required of him by the Board of Directors.
Section 5: Special meetings of the Board of Directors may be called by or at
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the request of the President or any director. The person or persons authorized
to call special meetings of the Board of Directors may fix any place, within or
without the State of Nevada, as the place for holding any special meeting of the
Board of Directors called by them.
Section 6: Notice of any special meeting shall be given at least two (2) days
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prior thereto by written notice delivered personally or mailed to each director
at his business address, or by telegram. If mailed, such notice shall be deemed
to be delivered when deposited in the United States mail so addressed, with
postage prepaid thereon. If notice be given by telegram, such notice shall be
deemed to be delivered when the telegram is delivered to the telegraph company.
Any director may waive notice of any meeting. The attendance of a director at a
meeting shall constitute a waiver of notice of such meeting, except where a
director attends a meeting for the express purpose of objecting to the
transaction of any business to be transacted at, nor the purpose of, any regular
or special meeting of the Board of Directors need be specified in the notice or
waiver of such meeting.
Section 7: A majority of the number of directors fixed according to Section 2
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of this Article IV shall constitute a quorum for the transaction of business at
any meeting of the Board of Directors, but if less than such majority is present
at a meeting, a majority of the directors present may adjourn the meeting from
time to time without further notice. Once a quorum has been established at a
duly organized meeting, the Board of Directors may continue to transact
corporate business until adjournment, notwithstanding the withdrawal of enough
members to leave less than a quorum.
Section 8: The act of the majority of the Directors present at a meeting at
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which a quorum is present shall be the act of the Board of Directors unless the
Statutes of the State of Nevada require a greater-than-majority vote, in which
case, such greater vote shall be required for the act to be that of the Board of
Directors.
Section 9: Any vacancy occurring in the Board of Directors, whether by reason
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of death, resignation, removal, or an increase in the number of directors, may
be filled by the affirmative vote of the majority of the remianing directors,
though less than a quorum of the Board of Directors, or by election at an annual
meeting or at a special meeting of the stockholders called for that purpose. A
director elected to fill a vacancy shall be elcted for the unexpired term ofhis
predecessor in office.
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Section 10: By resolution of the Board of Directors, the Directors may be paid
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their expenses, if any, of attendance at each meeting of the Board of Directors,
and may be paid a fixed sum for attendance at each meeting of the Board of
Directors or a stated salary as director. No such payment shall preclude any
director from serving the corporation in any other capacity and receiving
compensation therefor.
Section 11: A director of the corporation who is present at a meeting of the
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Board of Directors at which action on any corporate matter is taken shall be
presumed to have assented to the action taken unless his dissent shall be
entered in the minutes of the meeting or unless he shall file his written
dissent to such action with the Secretary of the meeting before the adjournment
thereof or shall express such dissent by written notice sent by registered mail
to the Secretary of the corporation within one (1) day after the adjournment of
the meeting. Such right to dissent shall not apply to a director who voted in
favor of such action.
Section 12: Any action required to be taken at a meeting of the Board of
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Directors, or any other action which may be taken at a meeting of the Board of
Directors, may be taken without a meeting if a written consent thereto is signed
by all the members of the Board. Such written consent shall be filed with the
minutes of proceedings of the Board. Any meeting of the Board of Directors may
be held by conference telephone call, with minutes thereof duly prepared and
entered into the Minute Book.
ARTICLE V
Officers
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Section 1: The officers of the corporation shall be a President, a Vice-
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President, a Secretary, a Treasurer, and a Resident Agent, each of whom shall be
elected by the Board of Directors. Other officers and assistant officers may be
authorized and elected or appointed by the Board of Directors. Any two (2) or
more offices may be held by the same person.
Section 2: The officers of the corporation shall be elected annually by the
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Board of Directors at the first meeting of the Board of Directors held after
each annual meeting of the stockholders. If the election of officers shall not
be held at such meeting, such election shall be held as soon thereafter as
convenient. Each officer shall hold office until his successor shall have been
duly elected and shall have qualified or until his death or until he shall
resign or shall have been removed in this manner hereinafter provided. Each
officer shall serve for a term of one (1) year, or until his successor is chosen
and qualified.
Section 3: Any Officer or agent elected or appointed by the of Directors may be
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removed by the Board of Directors whenever in its judgment the best interests of
the corporation would be served thereby, but such removal shall be without
prejudice to the contract rights, if any, of the person so removed.
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Section 4: A vacancy in any office because of death, resignation, removal,
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disqualification or otherwise, may be filled by majority vote of the Board of
Directors for the unexpired portion of the term of such office.
Section 5: The President shall preside at all meetings of the directors and the
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stockholders and shall have general charge and control over the affairs of the
corporation subject to the Board of Directors. He shall sign or countersign all
certificates, contracts and other instruments of the corporation as authorized
by the Board of Directors and shall perform such other duties as are incident to
his office or are required of him by the Board of Directors.
Section 6: The Vice-President shall exercise the functions of the President, in
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the President's absence, and shall have such powers and duties as may be
assigned to him from time to time by the Board of Directors.
Section 7: The Secretary shall issue notices for all meetings as required by
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the By-Laws, shall keep a record of the minutes of the proceedings of the
meetings of stockholders and directors, shall have charge of the Seal and of the
corporate books, and shall make such reports and perform such other duties as
are incident to his office, or properly required of him by the Board of
Directors.
Section 8: The Treasurer shall have the custody of all monies and securities of
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the corporation and shall keep regular books of account. He shall disburse the
funds of the corporation in payment of the just demands against the corporation,
or as may be ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the Board of Directors, from time to time as
may be required of him, an account of all his transactions as Treasurer and of
the financial condition of corporation. He shall perform all duties incident to
this office or which are properly required of him by the Board of Directors.
Section 9: The Resident Agent shall be in charge of the corporation's
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registered office, upon whom process against the corporation may be served, and
shall perform all duties required of him by statute.
Section 10: The salaries of all officers shall be fixed by the Board of
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Directors, and may be changed from time to time by a majority vote of the Board
of Directors.
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<PAGE>
ARTICLE VI
Agreements and Finances
-----------------------
Section 1: The Board of Directors may authorize any officer or officers, agent
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or agents, to enter into any contract or execute and deliver any instrument in
the name of and on behalf of the corporations and such authority may be general
or confined to specific instances.
Section 2: No loans shall be contracted on behalf of the corporation and no
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evidences of indebtedness shall be issued in its name unless authorized by a
resolution of the Board of Directors. Such authority may be general or confined
to specific instances.
Section 3: All checks, drafts or other orders for the payment of money, notes
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or other evidences of indebtedness issued in the name of the corporation shall
be signed by such duly authorized officer or officers, or agent or agents of the
corporation and in such manner as shall from time to time be determined by
resolution of the Board of Directors.
Section 4: All funds of the corporation not otherwise employed shall be
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deposited from time to time to the credit of the corporation in such banks,
trust companies or other depositories as the Board of Directors may select.
ARTICLE VII
Certificate of Shares
---------------------
Section 1: Certificates representing shares of the corporation shall be in such
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form as shall be determined by the Board of Directors. Such certificates shall
be executed by the President and by the Secretary or such other officers or
agents of the corporaiton that may be authorized by the Board of Directors from
time to time and such execution may be evidenced by an original signature or a
facsimile thereof. All certificates for shares shall be consecutively numbered
or otherwise identified. The name and address of the person to whom the shares
represented thereby are issued, with the number of shares and date of issue,
shall be entered on the stock transfer books of the corporation. All
certificates surrendered to the corporation for transfer shall be cancelled and
no new certificate shall be issued until the former certificate for a like
number of shares shall have been surrendered and cancelled, except in case of a
lost, destroyed or mutilated certificate, a new one may be issued therefor upon
such terms and indemnity to the corporation as the Board of Directors may
prescribe.
Section 2: Transfer of shares of the corporation shall be made only on the
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stock transfer books of the corporation by the holder of record thereof or by
his legal representative, who shall furnish proper evidence of authority to
transfer, or by his attorney authorized by power of attorney duly executed and
filed with the Secretary of the corporation, and on surrender for cancellation
of the certificate for such shares. The person in whose name shares stand on
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<PAGE>
the books of the corporation shall be deemed by the corporation to be the owner
thereof for all purposes, unless otherwise notified by such person in writing.
ARTICLE VIII
Fiscal Year
-----------
Section 1: The fiscal year of the corporation shall be fixed by of the Board of
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Directors.
ARTICLE IX
Seal
----
Section 1: The corporation may or may not have a corporate seal, as may from
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time to time be determined by resolution of the Board of Directors. If a
corporate seal is adopted, it shall have inscribed thereon the name of the
corporation and the words "Corporate Seal" and "Nevada". The seal may be used
by causing it or a facsimile thereof to be impressed or affixed or in any manner
reproduced.
ARTICLE X
Amendments
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Section 1: Those By-Laws may be amended by a majority vote of all the stock
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issued and outstanding and entitled to vote at any annual or special meeting of
the stockholders, provided notice of intention to amend shall have been
contained in the notice of the meeting.
Section 2: The Board of Directors, by a majority vote of the entire Board at
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any meeting, may amend these By-Laws, including By-Laws adopted by the
stockholders.
ARTICLE XI
Indemnification of Directors and Officers
-----------------------------------------
Section 1: Every person who was or is a party to, or is threatened to be made a
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part to, or is involved in any action, suit or proceedings, whether civil,
criminal, administrative or investigative, by reason of the fact that he or a
person of whom he is the legal representative is or was a director or officer of
the corporation or is or was serving at the request of the corporation as a
director or officer of another corporation, or as its representative in a
partnership, joint venture, trust or other enterprise,shall be indemnified and
hold harmless to
9
<PAGE>
the fullest extent legally permissible under the laws of the State of Nevada
from time to time against all expenses, liability and loss, including attorneys'
fees, judgments, fines and amounts paid or to be paid in settlement, reasonably
incurred or suffered by him in connection therewith, pursuant to NRS 78.151.
Such right of indemnification shall be a contract right which may be enforced in
any manner desired by such person.
This indemnification is intended to provide at all times the fullest
indemnification permitted by the laws of the State of Nevada and that
corporation may purchase and maintain insurance on behalf of any person who is
or was a director or officer of the corporation, or is or was serving at the
request of the corporation as a director or officer of another corporation, or
as its representative in a partnership, joint venture# trust or other enterprise
against any liability asserted against such person and incurred in any such
capacity or arising out of such status, whether or not the corporation would
have the power to indemnify such person.
10
<PAGE>
Exhibit 3.3
CERTIFICATE OF INCORPORATION
OF
NEW ZMAX CORPORATION
Article I. Name
The name of the Corporation is New ZMAX Corporation (the "Corporation").
Article II. Registered Office
The address of the Corporation's registered office in the State of
Delaware is 1013 Centre Road, in the City of Wilmington, County of New Castle,
19805. The name of its registered agent at such address is Corporation Service
Company.
Article III. Purpose
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.
Article IV. Capital Stock
(a) Number of Shares. The aggregate number of shares of stock that
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the Corporation has authority to issue is sixty million (60,000,000), of which
ten million (10,000,000) shares, with a par value of $0.001 per share, are
designated as Preferred Stock, and fifty million (50,000,000), with a par value
of $0.001 per share, are designated as Common Stock.
(b) No Preemptive Rights. The holders of the Common Stock will have
--------------------
no preemptive rights to subscribe for any shares of any class of stock of the
Corporation whether now or hereafter authorized.
(c) Provisions Relating to Preferred Stock. With respect to the
--------------------------------------
Preferred Stock, the Board of Directors is authorized, subject to limitations
prescribed by law and the provisions of this Article IV, to provide for the
issuance of the shares of Preferred Stock in series, and by filing a certificate
pursuant to the applicable law of the State of Delaware, to establish from time
to time the number of shares to be included in each such series, and to fix the
designation, powers, preferences and rights of the shares of each such series
and the qualifications, limitations or restrictions thereof.
Page 1 of 3
<PAGE>
Article V. Election of Directors
The election of directors need not be by written ballot.
Article VI. Incorporator; Initial Directors
The name and mailing address of the incorporator is Susan J. Thomas,
Esq., Powell, Goldstein, Frazer & Murphy LLP, Sixth Floor South, 1001
Pennsylvania Avenue, N.W., Washington, D.C. 20004. The powers of the
incorporator are to terminate upon the filing of this Certificate of
Incorporation. The names and mailing addresses of the persons who are each to
serve as a director until the first annual meeting of stockholders or until his
respective successor has been elected and qualified are as follows:
Name Mailing Address
---- ---------------
Michael C. Higgins 20251 Century Boulevard
Germantown, Maryland 20874
Michel Berty 20251 Century Boulevard
Germantown, Maryland 20874
Article VII. Bylaws
The Board of Directors is authorized to adopt, amend, or repeal bylaws
for the Corporation by a majority of the directors present at a meeting lawfully
convened.
Article VIII. Liability
To the full extent permitted by the General Corporation Law of the
State of Delaware or any of the applicable laws presently or hereafter in
effect, no director of the Corporation will be personally liable to the
Corporation or its stockholders with respect to any act or omission in the
performance of his or her duties as a director of the Corporation. Any
amendment or repeal of this Article VIII will not adversely affect any right or
protection of a director of the Corporation with respect to any act or omission
occurring before such amendment or repeal.
Article IX. Indemnification
(a) Right to Indemnification. Any person who was or is a party, or
------------------------
is threatened to be made a party, to any threatened, pending, or completed
proceeding, whether civil, criminal, administrative, or investigative (whether
or not by or in the right of the Corporation) by reason of the fact that he or
she is or was a director of the Corporation (or is or was serving at the request
of the Corporation as a director of another entity) is entitled to be
indemnified by the Corporation (an
Page 2 of 3
<PAGE>
"Indemnitee") to the full extent then permitted by law against judgments, fines,
penalties, excise taxes, amounts paid in settlement and costs charges and
expenses (including attorneys' fees and disbursements) that he or she incurs in
connection with such proceeding. The right to indemnification will continue as
to an Indemnitee who has ceased to hold the position by virtue if which he or
she was entitled to indemnification, and will inure to the benefit of his or her
heirs and personal representatives.
(b) Advancement of Expenses. The Corporation will, from time to
-----------------------
time, reimburse or advance to any Indemnitee the funds necessary for payment of
expenses, including attorneys' fees and disbursements, incurred in connection
with defending any proceeding for which he or she is indemnified by the
Corporation, in advance of the final disposition of such proceeding; provided
that, if then required by the Delaware General Corporation Law, the expenses
incurred by or on behalf of an Indemnitee may be paid in advance of the final
disposition of a proceedings only upon receipt by the Corporation of an
undertaking by or on behalf of such director or officer to repay any such amount
so advanced if it is ultimately determined by a final and unappealable judicial
decision that the Indemnitee is not entitled to be indemnified for such
expenses.
Article X. Action by Unanimous Written Consent of Stockholders
Any action that is required or permitted to be taken by the
stockholders of the Corporation at any annual or special meeting of stockholders
may be effected without a meeting only by the unanimous written consent of all
stockholders entitled to vote on the particular action.
IN WITNESS WHEREOF, I have signed this Certificate of Incorporation
this 29th day of May, 1997.
/s/ Susan J. Thomas
----------------------------------------
Susan J. Thomas, Incorporator
23150735.W51
<PAGE>
Exhibit 3.4
BYLAWS
OF
NEW ZMAX CORPORATION
ARTICLE I
Stockholders
Section 1.1. Annual Meetings. An annual meeting of stockholders
shall be held for the election of directors at such date, time and place, either
within or without the State of Delaware, as the Board of Directors may from time
to time direct by resolution. Any other proper business may be transacted at an
annual meeting.
Section 1.2. Special Meetings. Special meetings of the stockholders,
for any purpose or purposes, unless otherwise prescribed by the General
Corporation Law of the State of Delaware, may be called by the President or the
Board of Directors. The President will call a special meeting of the
stockholders at the request of the holders of not less than twenty-five percent
(25%) of all the outstanding shares of the Corporation entitled to vote at the
meeting.
Section 1.3. Notice of Meetings. Whenever stockholders are required
or permitted to take any action at a meeting, a written notice of the meeting
will be given that states the place, date and hour of the meeting and, in the
case of a special meeting, the purpose(s) for which the meeting is called.
Unless otherwise provided by law, the Certificate of Incorporation or these
Bylaws, the written notice of any meeting will be given not less than ten nor
more than sixty days before the date of the meeting to each stockholder entitled
to vote at such meeting. If mailed, such notice will be deemed to be given when
deposited in the United States mail, postage prepaid, directed to the
stockholder at his or her address as it appears in the records of the
Corporation.
Section 1.4. Waiver of Notice. A stockholder may waive notice of any
meeting; provided that a stockholder's attendance at a meeting shall constitute
waiver of notice of such meeting, except when the stockholder attends a meeting
for the express purpose of objecting to the transaction of any business to be
transacted at the meeting, and not for the purpose of objecting to the purpose
of the meeting.
Section 1.5. Adjournments. Any meeting of stockholders, annual or
special, may adjourn from time to time to reconvene at the same or some other
place, and notice need not be given of any such adjourned meeting if the time
and place are announced at the meeting at which the adjournment is taken. At
the adjourned meeting, the Corporation may transact any business that might have
been transacted at the original meeting. If the adjournment is for more than
<PAGE>
thirty days, or if after the adjournment a new record date is fixed for the
adjourned meeting, pursuant to Section 1.3, notice of the adjourned meeting will
be given to each stockholder of record entitled to vote at the meeting.
Section 1.6. Record Date.
(a) Determination of Record Date. For purposes of determining the
number and identity of stockholders for any purpose, the Board of Directors may
fix a date in advance as the record date for any such determination of
stockholders, provided that the record date may not proceed the date of the
resolution fixing the record date. The record date may not be more than sixty
days prior to the date that the particular action requiring the determination of
stockholders is to occur. If to determine the stockholders entitled to notice
of or to vote at a meeting of stockholders, the record date may not be fewer
than ten days prior to the meeting. The record date for determining stockholders
for any other purpose shall be at the close of business on the day on which the
Board of Directors adopts the resolution relating thereto. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders will apply to any adjournment of the meeting; provided that the
Board of Directors may fix a new record date for the adjourned meeting.
(b) Failure to Fix Record Date. If the stock transfer books are not
closed and no record date is fixed for the determination of stockholders
entitled to notice or to vote, or to receive payment of a dividend, the date on
which the notice is mailed or the Board of Directors resolution declaring the
dividend is adopted, as the case may be, will be the record date for such
determination of stockholders.
Section 1.7. List of Stockholders Entitled to Vote. At least ten
days before each meeting of stockholders, the officer or agent charged with
overseeing the stock transfer books of the Corporation will compile a complete
list of the stockholders entitled to vote at such meeting, or any adjournment
thereof, arranged in alphabetical order, with the address of and the number of
shares held by each. Such list will be kept on file at the Corporation's
principal office for the ten days before the meeting and will be subject to the
inspection of any stockholder during that ten-day period during normal business
hours for any purpose related to the meeting and during the meeting.
Section 1.8. Quorum. Except as otherwise provided by law, the
Certificate of Incorporation or these Bylaws, a majority of the outstanding
shares of the Corporation entitled to vote, represented in person or by proxy,
will constitute a quorum at a meeting of stockholders. If less than a majority
of the outstanding shares are represented at a meeting, a majority of the shares
so represented may adjourn the meeting from time to time without further notice.
If a quorum is present or represented at such adjourned meeting, any business
may be transacted that might have been transacted at the meeting as originally
notified. The
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<PAGE>
stockholders present at a duly organized meeting may continue to transact
business until adjournment, notwithstanding the withdrawal of enough
stockholders to leave less than a quorum.
Section 1.9. Voting.
(a) One Vote Per Share. Unless otherwise provided by the Certificate
of Incorporation or these Bylaws, each outstanding share entitled to vote will
be entitled to one vote on each matter submitted to a vote at a meeting of
stockholders.
(b) Required Vote. Unless the Delaware General Corporation Law
imposes a super-majority requirement with respect to a particular matter brought
before the stockholders, a majority vote of those shares present and voting at a
duly organized meeting will suffice to defeat or enact any proposal; provided
that with respect to votes to elect directors, a plurality of the votes cast
will be sufficient to elect .
(c) Shares Held By Other Than the Record Owner. Shares held by an
administrator, executor, guardian or conservator may be voted by him or her, in
person or by proxy, without the transfer of such shares into his or her name.
Shares held in the name of a trustee may be voted by him or her, in person or by
proxy, only if the shares are transferred into the trustee's name. Shares held
in the name of, by or under the control of a receiver may be voted by the
receiver without transferring the shares into the receiver's name if authority
to do so is evidenced in an order from the court that appointed the receiver. A
stockholder whose shares are pledged shall be entitled to vote his or her shares
until the shares are transferred into the name of the pledgee, and thereafter,
the pledgee will be entitled to vote the shares so transferred. Shares
belonging to the Corporation or held by it in a fiduciary capacity may not be
voted, directly or indirectly, at any meeting, and will not be counted in
determining the total number of outstanding shares at any given time.
Section 1.10. Proxies.
(a) General. At all meetings of stockholders, a stockholder may vote
by proxy. Proxies must be written, signed by the stockholder or by his or her
duly authorized attorney-in-fact, and filed with the Secretary of the
Corporation before or at the time of a meeting where a proxy is granted. No
proxy is valid after six months from the date of its execution, unless otherwise
provided in the proxy or coupled with an interest.
(b) Irrevocable Proxies. A proxy may be irrevocable if it states
that it is irrevocable and if, and only as long as, it is coupled with an
interest sufficient in law to support an irrevocable power.
(c) Revocation of a Proxy. A stockholder may revoke any proxy that
is not irrevocable by attending the meeting and voting in person or by filing an
instrument in writing revoking the
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proxy of by delivering a proxy in accordance with applicable law bearing a later
date to the Secretary of the Corporation.
ARTICLE II
Board of Directors
Section 2.1. Number; Qualifications. The Board of Directors shall
consist of not less than two (2) or more than eleven (11) members with the
specific number to be set from time to time by the affirmative vote of a
majority of the members of the Board of Directors. A director will hold office
until the next annual meeting of stockholders and until his or her successor is
elected and qualified. Directors need not be stockholders of the corporation.
Section 2.2. Election; Resignation; Vacancies. The Board of
Directors will initially consist of the persons named as director by the
incorporator, and each director so elected will hold office until the first
annual meeting of stockholders and until his or her successor is elected and
qualified. A director may resign at any time on written notice to the
Corporation. Any vacancy occurring in the Board of Directors, whether by reason
of death, resignation, removal, or an increase in the number of directors, may
be filled by the affirmative vote of the majority of the remaining directors,
though less than a quorum of the Board of Directors, or by election at an annual
meeting or at a special meeting of the stockholders called for that purpose. A
director elected to fill a vacancy will be elected for the unexpired term of his
predecessor in office.
Section 2.3. Regular Meetings. Regular meetings of the Board of
Directors may be held at such places within or without the State of Delaware and
at such times as the Board of Directors may from time to time determine. The
Board of Directors may provide, by resolution, the day, time and place for the
holding of additional regular meetings without other notice than such
resolution. A regular meeting of the Board of Directors shall be held
immediately after, and at the same place as, each annual meeting of
stockholders.
Section 2.4. Special Meetings. Special meetings of the Board of
Directors may be called by or at the request of the President or any director.
The person(s) authorized to call special meetings of the Board of Directors may
fix any place, within or without the State of Delaware, to hold a special
meeting of the Board of Directors. Notice of a special meeting must be given by
the person(s) calling the meeting at least two days before the meeting.
Section 2.5. Waiver of Notice. A director may waive notice of any
meeting. A director's attendance at a meeting shall constitute waiver of notice
of such meeting; provided that, when a director attends a meeting for the
express purpose of objecting to the transaction of any business to be transacted
at the meeting, and not for the purpose of objecting to the purpose of the
meeting, the director will not be deemed to have waived notice of such meeting.
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Section 2.6. Telephonic Meetings Permitted. Members of the Board of
Directors, or any committee designated by the Board of Directors, may
participate in a meeting thereof by means of telephone conference, or similar
communications equipment that permits all persons participating in the meeting
to hear each other, and participation in a meeting pursuant to this By-law will
constitute presence at such meeting.
Section 2.7. Quorum; Voted Required for Action. At all meetings of
the Board of Directors, a majority of the whole Board of Directors will
constitute a quorum for the transaction of business. Unless required by the
Delaware General Corporation Law, the Certificate of Incorporation or these
Bylaws, the vote of a majority of the directors present at a meeting at which a
quorum is present will be the act of the Board of Directors. If less than a
majority is present at a meeting, a majority of the directors present may
adjourn the meeting from time to time without further notice. Once a quorum has
been established at a duly organized meeting, the Board of Directors may
continue to transact corporate business until adjournment, notwithstanding the
withdrawal of enough members to leave less than a quorum.
Section 2.8. Payment of Expenses. By resolution of the Board of
Directors, directors may be paid their expenses, if any, of attendance at each
meeting of the Board of Directors. Directors may be paid also either a fixed
sum for attendance at each meeting of the Board of Directors or a stated salary
as director. Such payment will not preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor.
Section 2.9. Dissent to Corporate Action. A director who is present
at a meeting of the Board of Directors at which action on any corporate matter
is taken shall be presumed to have assented to the action taken unless he or she
(i) enters his or her dissent in the minutes of the meeting, (ii) files written
dissent to such action with the Secretary of the meeting before adjournment, or
(iii) expresses such dissent by written notice to the Secretary of the
Corporation within one (1) day after the adjournment of the meeting. The right
to dissent shall not apply to a director who voted in favor of such action.
Section 2.10. Action by Written Consent. Any action required or
permitted to be taken at a meeting of the Board of Directors may be taken
without a meeting if all members of the Board of Directors sign a written
consent with respect to such action. Such consent shall be filed with the
minutes of proceedings of the Board of Directors.
ARTICLE III
Committees
Section 3.1. Committees. The Board of Directors may, by resolution
passed by a majority of the whole Board of Directors, designate one or more
committees, each to consist of one or more of the directors. The Board of
Directors may designate one or more directors as
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alternate members of any committee, who may replace any absent or disqualified
member at any meeting of the committee. In the absence or disqualification of a
member of the committee, the member or members thereof present at any meeting
and not disqualified from voting, whether or not constituting a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in place of any such absent or disqualified member. Any such committee,
to the extent permitted by law and to the extent provided in the resolution of
the Board of Directors, will have and may exercise all the powers and authority
of the Board of Directors in the management of the business and affairs of the
Corporation, and may authorize the seal of the Corporation to be affixed to all
papers that may require it.
Section 3.2. Committee Rules. Unless the Board of Directors
otherwise provides, each committee designated by the Board of Directors may
make, alter and repeal rules for the conduct of its business. In the absence of
such rules, each committee will conduct its business in the same manner as the
Board of Directors conducts its business pursuant to Article II of these Bylaws.
ARTICLE IV
Officers
Section 4.1. Officers. The officers of the Corporation are
President, Vice President, Secretary, and Treasurer. Other officers and
assistant officers may be authorized and elected or appointed by the Board of
Directors. An individual is permitted to hold more than one office.
Section 4.2. Election. The officers of the Corporation will be
elected annually by the Board of Directors at the first meeting of the Board of
Directors held after each annual meeting of the stockholders. If the election
of officers is not held at such meeting, it will be held as soon thereafter as
convenient. Each officer will hold office until his or her successor is duly
elected and qualified, or until his or her death, resignation or removal.
Section 4.3. Removal. Any officer, elected or appointed, may be
removed by the Board of Directors, but such removal shall be without prejudice
to the contract rights, if any, of the person so removed.
Section 4.4. Vacancy. A vacancy in any office for any reason may be
filled by majority vote of the Board of Directors, and any officer so elected
will serve for the unexpired portion of the term of such office.
Section 4.5. President. The President presides at all meetings of
the Board of Directors and of the stockholders and has general charge and
control over the affairs of the Corporation subject to the Board of Directors.
The President signs or countersigns all certificates, contracts
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and other instruments of the Corporation as authorized by the Board of Directors
and performs such other duties incident to the office or required by the Board
of Directors.
Section 4.6. Vice President. The Vice President exercises the
functions of the President in the President's absence, and has such powers and
duties as may be assigned to him or her from time to time by the Board of
Directors.
Section 4.7. Secretary. The Secretary issues all required notices for
meetings of the Board of Directors and of the stockholders, keeps a record of
the minutes of the proceedings of the meetings of the Board of Directors and of
the stockholders, has charge of the Corporate Seal and the corporate books, and
makes such reports and performs such other duties as are incident to the office
or required by the Board of Directors.
Section 4.8. Treasurer. The Treasurer has custody of all monies and
securities of the Corporation, keeps regular books of account, disburses the
funds of the Corporation, renders account to the Board of Directors of all
transactions made on behalf of the Corporation and of the financial condition of
the Corporation from time to time as the Board requires, and performs all duties
incident to the office or properly required by the Board of Directors.
Section 4.9. Salaries. The salaries of all officers will be fixed by
the Board of Directors, and may be changed from time to time by a majority vote
of the Board of Directors.
ARTICLE V
Certificate of Shares
Section 5.1. Certificates. Certificates representing shares of the
Corporation will be in the form determined by the Board of Directors, and will
be signed by the Chairman of the Corporation or any officer, certifying the
number of shares owned by him or her in the Corporation. Any of or all the
signatures on the certificate may be a facsimile. If any officer, transfer
agent or registrar who has signed, or whose facsimile signature has been placed
upon, a certificate ceases to hold that position before the certificate is
issued, it may be issued by the Corporation with the same effect as if the
officer, transfer agent or registrar continued to hold that position at the date
of issue.
Section 5.2. Lost, Stolen or Destroyed Stock Certificates; Issuance
of New Certificates. If a certificate is lost, stolen or destroyed, a new one
may be issued on such terms and indemnity to the Corporation as the Board of
Directors may prescribe.
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<PAGE>
ARTICLE VI
Indemnification of Directors and Officers
Section 6.1. Right to Indemnification. Every person who was or is a
party to, or is threatened to be made a party to, or is involved in any action,
suit or proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that he or she, or a person of whom he is the legal
representative, is or was a director of the Corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, or as its representative in another enterprise (an
"Indemnitee"), will be indemnified and held harmless to the fullest extent
legally permissible under the laws of the State of Delaware against all
expenses, liability and loss, including attorneys' fees, judgments, fines and
amounts paid or to be paid in settlement, reasonably incurred or suffered by him
in connection therewith. Such right of indemnification is a contract right which
may be enforced in any manner desired by such person. The corporation may
purchase and maintain insurance on behalf of an Indemnitee against any liability
arising out of such status, whether or not the corporation would have the power
to indemnify such person.
ARTICLE VII
General Provisions
Section 7.1. Fiscal Year. The fiscal year of the Corporation will be
fixed by of the Board of Directors.
Section 7.2. Amendments. These Bylaws may be amended or repealed or
new Bylaws may be adopted (i) at any regular or special meeting of stockholders
at which a quorum is present or represented, by the vote of the holders of
shares entitled to vote in the election of any directors, provided notice of the
proposed alteration, amendment or repeal is contained in the notice of such
meeting; or (ii) by affirmative vote of a majority of the Board of Directors at
any regular or special meeting.
Section 7.3. Books and Records; Examination. Any records maintained
by the Corporation in the regular course of its business, including its stock
ledger, books of account, and minute books, may be kept on, or be in any form of
information storage, provided that the records can be converted into clearly
legible form with a reasonable time. The books and records of the Corporation
may be kept outside of the State of Delaware. Except as may otherwise be
provided by Delaware law, the Board of Directors will have the power to
determine from time to time whether and to what extent and at what times and
places and under what conditions any of the accounts, records and books of the
Corporation are to be open to the inspection of any stockholder.
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<PAGE>
Section 7.4. Dividends. Subject to the provisions, if any, of the
General Corporation Law of Delaware and the Certificate of Incorporation,
dividends on the capital shares of the Corporation may be declared by the Board
of Directors at any regular or special meeting. Dividends may be paid in cash,
in property or in shares of the capital stock. Before payment of any dividend,
the Board of Directors may set aside out of any funds of the Corporation
available for dividends such reserves for any purpose that the directors will
think conducive to the interests of the Corporation.
Section 7.5. Seal. The Corporation may or may not have a corporate
seal, as may from time to time be determined by resolution of the Board of
Directors. If a corporate seal is adopted, it will have inscribed thereon the
name of the corporation and the words "Corporate Seal" and "Delaware". The seal
may be used by causing it or a facsimile thereof to be impressed or affixed or
in any manner reproduced.
Section 7.6. Checks. All checks or demands for money and notes of
the Corporation will be signed by one or more officers of the Corporation as the
Board of Directors may from time to time designate.
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<PAGE>
Exhibit 4.1
THIS DEBENTURE IS NON-NEGOTIABLE AND NON-TRANSFERABLE.
THIS DEBENTURE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED.
EXCHANGEABLE SUBORDINATED DEBENTURE
U.S. $1,500,000 December 6, 1996
FOR VALUE RECEIVED, the undersigned, ZMAX CORPORATION, a Nevada corporation
(the "Company"), promises to pay to the order of the holder of this Debenture
---------
named below (the "Holder"), the principal sum of ONE MILLION FIVE HUNDRED
--------
THOUSAND UNITED STATES DOLLARS (U.S$1,500,000), on December 6, 1999 (the
"Maturity Date"), together with interest on the outstanding principal balance of
- ---------------
this Debenture from the date hereof until fully paid, at a fixed simple interest
rate of eight percent (8.0%) per annum.
Interest will accrue on and, to the extent accrued, will be paid by the
Company semi-annually, commencing on June 1, 1997 and on each December 1 and
June 1 thereafter until the principal amount of this Debenture has been paid in
full. Should any installment of interest not be paid when due and such failure
continues for a period of 30 days after the Holder has given written notice to
the Company (an "Event of Default"), then the Holder will have the option to (i)
------------------
declare the unpaid principal of and interest on this Debenture to be forthwith
due and payable or (ii) exercise its conversion rights for all the unpaid
principal as set forth below. The entire principal amount hereof, together with
all accrued and unpaid interest hereon, will be due and payable on the Maturity
Date or upon the acceleration of this Debenture following the occurrence of an
Event of Default.
Interest will be calculated on the basis of three hundred sixty (360) days
per year for the actual number of days elapsed. The Company's interest
calculations will control absent manifest error.
The principal hereof and interest hereon will be payable in lawful money of
the United States of America, at the address of the Holder stated below or at
such other place as the Holder hereof may designate in writing to the Company.
All payments hereunder received from the Company by the Holder will be applied
first to interest to the extent then accrued and then to principal.
The Company may redeem or prepay (the "Redemption") this Debenture in full
------------
or in part at any time upon ten (10) days prior written notice to the Holder
(the "Redemption Notice"), without
-------------------
-1-
<PAGE>
penalty, premium, prepayment fee, or payment of unearned interest; provided,
however, that the Company's right of Redemption is subject to the satisfaction
by the Company of both of the following conditions:
(i) The Company has offered to exchange (the "Exchange Offer") this
----------------
Debenture for the Company's authorized voting common stock, par value of $.0001
per share (the "Stock") and a warrant substantially in the form attached hereto
-------
as Exhibit A (subject to any modifications required by any regulatory authority
---------
or recommended by legal counsel) ("Warrant") to purchase additional Stock on the
---------
terms set forth below, which Exchange Offer will remain open for a period of
time no less than twenty (20) business days:
(a) If the Exchange Offer is made on or before the six month
anniversary of this Debenture, the Exchange Offer will offer to exchange
each $5.00 principal amount of this Debenture outstanding for: (a) one
share of Stock, plus (b) one Warrant to purchase the number of shares of
the Stock equal in the aggregate to the number of shares of Stock received
in the Exchange Offer, at any time through the second anniversary of the
date of issuance of the Warrant. The purchase price of the Stock subject
to the Warrant will be equal to $7.00 per share for the period of time up
to the first anniversary of the date of issuance of the Warrant, increasing
to $8.00 per share for the period of time between the first anniversary of
the date of issuance of the Warrant through the second anniversary of the
date of issuance of the Warrant; or
(b) If the Exchange Offer is made after the six month anniversary
of this Debenture, the Exchange Offer will offer to exchange each $5.00
principal amount of this Debenture outstanding for: (a) one and one-tenth
(1.1) share of Stock, plus (b) one Warrant to purchase the number of shares
of the Stock equal in the aggregate to the number of shares of Stock
received in the Exchange Offer and on the same terms as stated above; and
(ii) The Company has prepared, filed and caused to be declared
effective by the United States Securities and Exchange Commission, a
registration statement pursuant to the Securities Act of 1933, as amended (the
"Securities Act"), pertaining to the Exchange Offer by the Company.
- ----------------
Prior to the Maturity Date or upon receipt of the Redemption Notice but
prior to Redemption by the Company, the Holder may, but has no obligation to,
convert (the "Conversion") the entire principal balance, but not part, of this
------------
Debenture into shares of Stock. Upon Conversion, the Holder will receive one
share of Stock
-2-
<PAGE>
in exchange for each $5.00 of the principal amount of this Debenture. Such
Conversion will be in complete satisfaction of all amounts due and payable under
this Debenture.
As a condition to any issuance of shares of Stock or rights thereto, the
Company may require that it be provided information reasonably satisfactory to
the Company that establishes compliance with applicable securities laws and
regulations.
The Company will at all times during the term of this Debenture reserve and
keep available, solely for issuance, sale and delivery upon the exercise of the
Conversion or the Exchange Offer under the terms of this Debenture, a number of
shares of Stock equal to the number of shares issuable upon the exercise of the
Conversion or the Exchange Offer by the Holder.
No fractionalized shares of Stock will be issued in exchange or Conversion
of this Debenture. The shares of Stock issued to the Holder as a result of any
exchange or Conversion of this Debenture in accordance with the terms hereof
will be rounded down to the nearest whole share and the principal amount of this
Debenture allocated to any fractionalized share will be returned to the Holder.
This Debenture is issued pursuant to the terms of a certain Subscription
Agreement, dated as set forth below, between the Company and the Holder, as
amended (the "Subscription Agreement"). The acknowledgements, representations
------------------------
and covenants respectively made by the Holder and the Company in the
Subscription Agreement are incorporated in this Debenture as if made and set
forth in this Debenture in full.
This Debenture is secured only by the general credit of the Company, and
not by any mortgage, deed of trust or security interest in or upon any real or
personal property.
Payments under this Debenture rank pari passu without any preference among
the debentures issued contemporaneously with this Debenture and with all
obligations of the Company that are not by the terms of such obligations made
superior to other obligations of the Company.
This Debenture has been issued in the State of Maryland and will be
construed and enforced in accordance with the laws of the State of Maryland,
without referenced to its doctrines or principles of conflicts or laws and
notwithstanding any provisions to the contrary contained in the Subscription
Agreement.
All notices given pursuant to this Debenture must be in writing and may be
given by personal delivery, registered or certified mail or by reputable express
courier service at the
-3-
<PAGE>
address of the parties set forth on the signature page of this Debenture. Any
party to this Debenture may by notice so given change its address for any future
notices.
THIS DEBENTURE IS NON-NEGOTIABLE AND NON-TRANSFERABLE. This Debenture, and
the interests herein, may not be sold, assigned, pledged, hypothecated or
otherwise negotiated or transferred, and any such attempted negotiation or
transfer of this Debenture will be null and void and of no force or effect.
[Signature on following page.]
-4-
<PAGE>
EXECUTED as of the date written above.
ZMAX CORPORATION, a Nevada corporation
By: /s/G.W. Norman Wareham
-------------------------------
G.W. Norman Wareham
Vice President and Chief Financial Officer
------------------------------------------
Address for Notices:
c/o Century Services, Inc.
First Floor
20251 Century Boulevard
Germantown, Maryland 20874
Attention: G.W. Norman Wareham
Name of Holder:
Address:
Contact:
Subscription Agreement Date:
----------------------------------
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<PAGE>
Exhibit 4.2
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, OR
HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT RELATED
THERETO OR AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY, THAT SUCH
REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
COMMON STOCK WARRANT
of
ZMAX CORPORATION
Date: ______________________________
THIS CERTIFIES that, for value received _________________________________
(the "Warrantholder") is entitled, upon the terms and subject to the conditions
set forth herein, to purchase from ZMAX CORPORATION, a Nevada corporation (the
"Company"), __________________________ (______) shares of the common stock, par
value $0.001 (the "Common Stock") of the Company (the "Shares") at the purchase
price per share of $7.00, if exercised prior to the first anniversary of the
date of this Warrant, or $8.00 per share if exercised thereafter (the "Exercise
Price"). The number of shares and Exercise Price are subject to adjustment as
provided below.
This Warrant is being issued to the Warrantholder in connection with the
exchange of a certain Subordinated Exchangeable Debenture held by the
Warrantholder and is subject to the following terms and conditions:
1. Exercise of Warrant. This Warrant may be exercised in whole or in
-------------------
part, at any time, or from time to time, after the date hereof and on or before
the second anniversary of the date hereof by the surrender of this Warrant and
the Notice of Exercise annexed hereto (duly completed and executed on behalf of
the Warrantholder) to the Company and by the payment of the Exercise Price for
the Shares to be purchased by the Warrantholder to the Company by cash or check
acceptable to the Company. The Company will prepare a certificate for the
Shares purchased and, if this Warrant is exercised in part, a new Warrant for
the unexercised portion of this Warrant. The Company agrees that, upon exercise
of this Warrant in accordance with the terms hereof, the Shares so purchased
will be deemed to be issued to the Warrantholder as the record owner of such
Shares as of the close of business on the date on which this Warrant was
exercised.
If the Company reasonably determines that registration under the Securities
Act of 1933, as amended (the "Act"), is required or that the Warrantholder has
failed to provide the Company with such information as may be necessary to
establish an exemption from the registration requirements under the Act, the
Company may defer the exercise of this Warrant until either a registration
statement under the Act has been declared effective or the Warrantholder has
provided information satisfactory to the Company that establishes the
availability of an exemption from the registration requirements under the Act.
Certificates for Shares purchased under this Warrant and, on partial
exercise of this Warrant, a new Warrant for the unexercised portion of this
Warrant will be delivered to the Warrantholder or as such Warrantholder may
direct as promptly as practicable after the date on which this Warrant
<PAGE>
was exercised. The Company covenants that all Shares that may be issued upon
the exercise of rights represented by this Warrant will, upon exercise of the
rights represented by this Warrant and payment of the Exercise Price, be fully
paid and nonassessable.
With the consent of the Company, which consent with not be unreasonably
withheld, and subject to applicable laws and regulations, the Warrantholder may
direct that the certificates for Shares purchased under this Warrant be issued
in name or names other than the name of the Warrantholder. In this case, this
Warrant when surrendered for exercise must be accompanied by the Assignment Form
attached hereto duly executed by the Warrantholder and the Notice of Exercise
duly completed and executed and stating in whose name or names certificates are
to be issued.
2. Reservation of Shares; No Impairment or Amendment. The Company will
-------------------------------------------------
at all times reserve and keep available, solely for issuance, sale and delivery
upon the exercise of this Warrant, a number of shares of Common Stock equal to
the number of shares of Common Stock issuable upon the exercise of this Warrant.
The Company will not by any amendment of its Articles of Incorporation or
through any other means, avoid or seek to avoid the observance or performance of
any of the terms of this Warrant.
3. Expiration. This Warrant, if not exercised by Warrantholder, will
----------
expire on the second anniversary of the date hereof.
4. Adjustments of Exercise Price and Number of Shares Purchasable. The
--------------------------------------------------------------
Exercise Price and the number of shares purchasable under this Warrant is
subject to adjustment from time to time in accordance with the following
provisions:
(a) Reorganization, Consolidation or Merger. If at any time there is
---------------------------------------
a reorganization, consolidation or merger of the Company with or into another
corporation or entity when the Company is not the surviving entity, or the
transfer of all or substantially all of its properties or assets to any other
person or entity under any plan or arrangement contemplating the dissolution of
the Company, then in each such case, the Company, or such successor entity, as
the case may be, will execute a new Warrant providing that the Warrantholder
will have the right to exercise such new Warrant and, upon such exercise, to
receive, in lieu of each share issuable upon exercise of this Warrant, the
number and kind of shares of stock, other securities, money or property
receivable upon such reorganization, consolidation or merger by a holder of the
number of shares then purchasable with this Warrant. Such new Warrant will
contain provisions relating to the rights and obligations of the Warrantholder
and the Company after such reorganization, consolidation or merger that will
have, as nearly as possible after appropriate adjustment, the same effect as the
provisions of this Warrant, including the provisions of this Warrant relating to
the exercise price and number and type of shares of stock deliverable upon
exercise.
(b) Reclassification, etc. If the Company, at any time, by
----------------------
subdivision, combination or reclassification of securities or otherwise, changes
any of the securities as to which purchase rights under this Warrant exist into
the same or a different number of securities of any other class or classes, this
Warrant will thereafter represent the right to acquire such number and kind of
securities as would have been issuable as the result of such change with respect
to the
-2-
<PAGE>
securities which were subject to the purchase rights under this Warrant
immediately prior to such subdivision, combination, reclassification or other
change.
(c) Certain Dividends. If the Company at any time while this Warrant
-----------------
is outstanding and unexpired pays a dividend (other than dividends out of
retained earnings), or make any other distribution with respect to Common Stock
payable in stock (other than Common) or other securities or property, then the
Company will provide by resolution of the Company's Board of Directors that on
exercise of this Warrant, the Warrantholder will receive, in addition to the
shares of Common Stock otherwise receivable on exercise hereof, the same number
and kind of stock, other securities and property which the Warrantholder would
have received had the Warrantholder held the shares of Common Stock receivable
on exercise hereof on and before the record date for such dividend or
distribution.
(d) Adjustment to Exercise Price. The Exercise Price will be
----------------------------
proportionately adjusted based on any adjustment to the number of Shares
purchasable hereunder following the date of this Warrant.
5. Notice of Adjustment; Notices. Whenever the Exercise Price or number
-----------------------------
of shares purchasable hereunder will be adjusted, the Company at its expense
will promptly issue a certificate signed by an executive officer of the Company
setting forth, in reasonable detail, the event requiring the adjustment, the
amount of the adjustment, the method by which such adjustment was calculated and
the Exercise Price and number of shares purchasable hereunder after giving
effect to such adjustment, and will cause a copy of such certificate to be sent
to the Warrantholder.
6. No Fractionalized Shares. No fractionalized shares of Common Stock or
------------------------
other security will be issued upon exercise of this Warrant. The shares of
Common Stock or other security issued to the Warrantholder as a result of any
exercise of this Warrant in accordance with the terms hereof will be rounded
down to the nearest whole share.
7. Transfer of Warrant. This Warrant and all rights hereunder are
-------------------
transferable, in whole or in part, but only with the prior written consent of
the Company, which consent will not be unreasonably withheld. In order to
transfer this Warrant, the Warrantholder must deliver to the Company this
Warrant together with the Assignment Form annexed hereto properly endorsed.
Upon receipt thereof, the Company will affect such transfer as promptly as
practicable.
8. No Voting Rights, Etc. Prior to the proper exercise of this Warrant,
---------------------
the Warrantholder, as such, is not entitled to vote or receive dividends or be
deemed to be a shareholder of the Company for any purposes, nor may anything
contained in this Warrant be construed to confer such rights upon Warrantholder.
9. Registry of Warrant. The Company will maintain a registry showing the
-------------------
name and address of the Warrantholder and the Company will be entitled to rely
in all respects, prior to written notice to the contrary, upon such registry.
The Warrantholder is responsible for notifying the Company of any change of its
address.
-3-
<PAGE>
10. Loss, Theft, Destruction or Mutilation of Warrant. Upon receipt by
-------------------------------------------------
the Company of evidence reasonably satisfactory to it of the loss, theft,
destruction or mutilation of this Warrant, and in case of loss, theft or
destruction, of indemnity or security reasonably satisfactory to the Company,
and upon reimbursement to the Company of all reasonable expenses incidental
thereto, and upon surrender and cancellation of this Warrant, if mutilated, the
Company will replace this Warrant with a new Warrant of like tenor, dated as of
such cancellation, and deliver it to the Warrantholder.
11. Office for Exercise or Exchange. This Warrant may be surrendered for
-------------------------------
exchange, transfer or exercise, in accordance with its terms, at the principal
office of the Company in Maryland, at c/o Century Services, Inc., First Floor,
20251 Century Boulevard, Germantown, Maryland 20874, or at such other office or
such other office or agency of the Company as it may designate in writing to the
Warrantholder at its address appearing on the Company's registry or other books.
12. Charges, Taxes and Expenses. Issuance of certificates to the
---------------------------
Warrantholder for Shares upon the exercise of this Warrant will be made without
charge to the Warrantholder for any issue or transfer tax or other incidental
expense in respect of the issuance of such certificates, all of which taxes and
expenses will be paid by the Company. However, if the certificates are to be
issued in a name or names other than the name of the Warrantholder, the Company
may require, as a condition to such issuance, the payment of a sum sufficient to
reimburse it for any transfer tax incidental thereto.
13. Miscellaneous.
-------------
(a) Governing Law. This Warrant constitutes a contract under and will
-------------
be construed in accordance with and governed by the internal laws of the State
of Maryland.
(b) Successors and Assigns. This Warrant is binding upon any
----------------------
successors or assigns of the Company and the Warrantholder and of the Shares
issued or issuable upon the exercise hereof.
(c) Definition of Warrantholder. The term Warrantholder means the
---------------------------
Warrantholder named in the first paragraph of this Warrant and any successor or
permitted assign of such Warrantholder known to the Company and reflected on the
Company's registry as the holder of this Warrant.
(d) Restrictions. THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE
------------
SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED, OR HYPOTHECATED IN THE ABSENCE OF ANY EFFECTIVE REGISTRATION STATEMENT
RELATED THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH
REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
(e) Amendments. This Warrant may be amended and the observance of any
----------
term of this Warrant may be waived only with the written consent of the Company
and the then holders
-4-
<PAGE>
of Warrants exercisable for a majority of the shares of the Company's Common
Stock (or other securities or property, as the case may be) then issuable upon
exercise of all outstanding unexercised Warrants.
(f) Notice. Any notice required or permitted under this Warrant will
------
be deemed effectively given upon personal delivery, delivery by recognized
international express courier or upon deposit with the United States Post
Office, by certified mail, postage prepaid and addressed to the party to be
notified at the address indicted below for such party, or at such other address
as such other party may designate by ten-day advance written notice.
(g) Acceptance. Receipt of this Warrant by the Warrantholder
----------
constitutes acceptance of and agreement to the foregoing terms and conditions.
[Remainder of Page Intentionally Left Blank]
-5-
<PAGE>
EXECUTED on the date written above.
ZMAX CORPORATION, a Nevada corporation
By:
----------------------------------------
Name:
Title:
WARRANT HOLDER:
[NAME]
Address:
<PAGE>
NOTICE OF EXERCISE
To: ZMAX Corporation
1. The undersigned hereby elects to purchase __________________ shares of
Common Stock ("Stock") of ZMAX Corporation (the "Company") pursuant to the terms
of the attached Warrant, and tenders herewith payment of the purchase price,
together with an Investment Representation Statement (see attached form) in form
and substance satisfactory to legal counsel to the Company.
2. The shares of Stock to be received by the undersigned upon exercise of
the Warrant are being acquired for its own account, not as a nominee or agent,
and not with a view to resale or distribution of any part thereof, and the
undersigned has no present intention of selling, granting any participation in,
or otherwise distributing the same. The undersigned further represents that it
does not have an contract, undertaking, agreement or arrangement with any person
to sell, transfer or grant participation to such person or to any third person,
with respect to the Stock. The undersigned believes it has received all the
information it considers necessary or appropriate for deciding whether to
purchase the Stock.
3. The undersigned understands that the shares of Stock and the shares of
the Company's Common Stock into which the Stock is convertible are characterized
as "restricted securities" under the federal securities laws inasmuch as they
are being acquired from the Company in transactions not involving a public
offering and that under such laws and applicable regulations such securities may
be resold without registration under the Securities Act of 1933, as amended (the
"Act"), only in certain limited circumstances. In this connection, the
undersigned represents that it is familiar with Rule 144 promulgated under the
Act, as presently in effect, and understandings the resale limitations imposed
thereby and by the Act.
4. The undersigned is an "accredited investor" as defined in Rule 502 of
Regulation D under the Act or is not a "U.S. Person" as defined in Rule 902
regulations under the Act.
5. The undersigned understands the instruments evidencing the Stock may
bear one or all of the following legends:
(a) "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED,
OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
RELATED THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT
SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED."
(b) Any legend required by applicable state law.
<PAGE>
6. Please issue a certificate or certificates representing said shares of
Stock in the name set forth below.
---------------------------------
[Please type or print name]
7. Please issue a new Warrant for the unexercised portion of the attached
Warrant in the name set forth below.
---------------------------------
[Please type or print name]
WARRANTHOLDER
By:
-----------------------------------
Name:
Title:
Date:
--------------------
<PAGE>
ASSIGNMENT FORM
(To assign the foregoing Warrant, execute this form and supply
required information. Do not use this form to purchase shares.)
FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby
are hereby assigned to
---------------------------------
[Please type or print name.]
whose address is
----------------------------------------
[Please type or print address.]
----------------------------------------
----------------------------------------
WARRANTHOLDER
By:
----------------------------------
Name:
Title:
Date:
------------------------------
Signature Guaranteed:
---------------------------
NOTE: The signature to this Assignment Form must correspond with the name as it
appears on the face of the Warrant, without alteration or enlargement or any
change whatever, and must be guaranteed by a bank or trust company. Officers of
a corporation and those acting in a fiduciary or other representative capacity
should file proper evidence of authority to assign the foregoing Warrant.
<PAGE>
INVESTMENT REPRESENTATION STATEMENT
PURCHASER: _______________________________________
COMPANY: ZMAX Corporation
SECURITIES: Warrant to purchase _____________ shares of Common Stock
DATE: _____________________
In connection with the purchase of the above-listed Securities, the undersigned,
the Purchaser, represents to the Company the following:
(a) The undersigned is sufficiently aware of the Company's business
affairs and financial condition to reach an informed and knowledgeable decision
to acquire the Securities. The undersigned is purchasing these Securities for
its own account for investment purposes only and not with a view to, or for the
resale in connection with, any "distribution" thereof for purposes of the
Securities Act of 1933, as amended (the "Securities Act").
(b) The undersigned understands that the Securities have not been
registered under the Securities Act in reliance upon a specific exemption
therefrom, which exemption depends upon, among other things, the bona fide
nature of its investment intent as expressed herein. In this connection, the
undersigned understands that, in the view of the Securities and Exchange
Commission (the "SEC"), the statutory basis for such exemption may be
unavailable if its representation was predicated solely upon a present intention
to hold these Securities for the minimum capital gains period specified under
tax statutes for a deferred sale, for or until an increase or decrease in the
market price of the Securities, or for a period of one year or any other fixed
period in the future.
(c) The undersigned further understands that the Securities must be
held indefinitely unless subsequently registered under the Securities Act or
unless an exemption from registration is otherwise available (such as Rule 144
under the Securities Act). In addition, the undersigned understands that the
certificate evidencing the Securities may be imprinted with a legend which
prohibits the transfer of the Securities unless they are registered or such
registration is not required in the opinion of counsel for the Company.
(d) The undersigned is familiar with the provisions of Rule 144,
promulgated under the Securities Act, which, in substance, permits limited
public resale of "restricted securities" acquired, directly or indirectly, from
the issuer thereof (or from an affiliate of such issuer), in a non-public
offering subject to the satisfaction of certain conditions, including, among
other things: (1) The availability of certain public information about the
Company; (2) the resale occurring not less than two years after the party has
purchased, and made full payment for, within the meaning of Rule 144, the
securities to be sold; and, in the case of an affiliate, or of a non-affiliate
who has held the securities less than three years; and (3) the sale being made
through a broker in an unsolicited
<PAGE>
"broker's transaction" or in transactions directly with a market maker, as said
term is defined under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and the amount of securities being sold during any three month
period not exceeding the specified limitation stated therein, if applicable.
There can be no assurances that the requirements of Rule 144 will be met, or
that the Securities will ever be saleable.
(e) The undersigned further understands that at the time the
undersigned wishes to sell the Securities there may be no public market upon
which to make such a sale, and that, even if such a public market then exists,
the Company may not be satisfying the current public information requirements of
Rule 144, and that, in such event, the undersigned would be precluded from
selling the Securities under Rule 144 even if the two-year minimum holding
period has been satisfied.
(f) The undersigned further understands that in the event all of the
applicable requirements of Rule 144 are not satisfied registration under the
Securities Act, compliance with some other registration exemption or the
notification to the Company of the proposed disposition by it and the furnishing
to the Company of (i) detailed information regarding the disposition, and (ii)
and opinion of its counsel to the effect that such disposition will not require
registration (the undersigned understands such counsel's opinion must concur
with the opinion by counsel for the Company and the undersigned must have been
informed of such compliance) will be required and that, notwithstanding the fact
that Rule 144 is not exclusive, the Staff of the SEC has expressed its opinion
that person proposing to sell private placement securities other than in a
registered offering and otherwise than pursuant to Rule 144 will have a
substantial burden of proof in establishing that an exemption from registration
is available for such offers or sales, and that such persons and their
respective brokers who participate in such transactions do so at their own risk.
Signature of Purchaser:
By:
--------------------------------
Name:
Title:
<PAGE>
Exhibit 10.1
ZMAX CORPORATION
1997 STOCK INCENTIVE PLAN
<PAGE>
ZMAX CORPORATION
1997 STOCK INCENTIVE PLAN
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
SECTION 1 DEFINITIONS............................................... 1
1.1 Definitions......................................... 1
-----------
SECTION 2 THE STOCK INCENTIVE PLAN.................................. 4
2.1 Purpose of the Plan................................. 4
-------------------
2.2 Stock Subject to the Plan........................... 4
-------------------------
2.3 Administration of the Plan.......................... 4
--------------------------
2.4 Eligibility and Limits.............................. 4
----------------------
SECTION 3 TERMS OF STOCK INCENTIVES................................. 5
3.1 Terms and Conditions of All Stock Incentives........ 5
--------------------------------------------
3.2 Terms and Conditions of Options..................... 5
-------------------------------
(a) Option Price................................. 6
------------
(b) Option Term.................................. 6
-----------
(c) Payment...................................... 6
-------
(d) Conditions to the Exercise of an Option...... 7
---------------------------------------
(e) Termination of Incentive Stock Option........ 7
-------------------------------------
(f) Special Provisions for Certain Substitute
-----------------------------------------
Options...................................... 7
-------
3.3 Terms and Conditions of Stock Appreciation Rights... 7
-------------------------------------------------
(a) Settlement................................... 8
----------
(b) Conditions to Exercise....................... 8
----------------------
3.4 Terms and Conditions of Stock Awards................ 8
------------------------------------
3.5 Terms and Conditions of Dividend Equivalent Rights.. 8
--------------------------------------------------
(a) Payment...................................... 8
-------
(b) Conditions to Payment........................ 9
---------------------
3.6 Terms and Conditions of Performance Unit Awards..... 9
-----------------------------------------------
(a) Payment...................................... 9
-------
(b) Conditions to Payment........................ 9
---------------------
3.7 Terms and Conditions of Phantom Shares.............. 9
--------------------------------------
(a) Payment...................................... 9
-------
(b) Conditions to Payment........................ 10
---------------------
3.8 Treatment of Awards Upon Termination of Employment.. 10
--------------------------------------------------
SECTION 4 RESTRICTIONS ON STOCK..................................... 10
4.1 Escrow of Shares.................................... 10
----------------
4.2 Restrictions on Transfer............................ 10
------------------------
</TABLE>
<PAGE>
<TABLE>
<S> <C>
SECTION 5 GENERAL PROVISIONS....................................... 11
5.1 Withholding........................................ 11
-----------
5.2 Changes in Capitalization; Merger; Liquidation..... 11
----------------------------------------------
5.3 Cash Awards........................................ 12
-----------
5.4 Compliance with Code............................... 12
--------------------
5.5 Right to Terminate Employment...................... 12
-----------------------------
5.6 Non-alienation of Benefits......................... 12
--------------------------
5.8 Listing and Legal Compliance....................... 13
----------------------------
5.9 Termination and Amendment of the Plan.............. 13
-------------------------------------
5.10 Stockholder Approval............................... 13
--------------------
5.11 Choice of Law...................................... 14
-------------
5.12 Effective Date of Plan............................. 14
----------------------
</TABLE>
-ii-
<PAGE>
ZMAX CORPORATION
1997 STOCK INCENTIVE PLAN
SECTION 1 DEFINITIONS
1.1 Definitions. Whenever used herein, the masculine pronoun will be
-----------
deemed to include the feminine, and the singular to include the plural, unless
the context clearly indicates otherwise, and the following capitalized words and
phrases are used herein with the meaning thereafter ascribed:
(a) "Affiliate" means:
---------
(a) an entity that directly or through one or more
intermediaries is controlled by the Company, and
(b) any entity in which the Company has a significant
equity interest, as determined by the Company.
(b) "Board of Directors" means the board of directors of the
------------------
Company.
(c) "Code" means the Internal Revenue Code of 1986, as amended.
----
(d) "Committee" means the committee appointed by the Board of
---------
Directors to administer the Plan. The Board of Directors shall consider the
advisability of whether the members of the Committee shall consist solely of at
least two members of the Board of Directors who are both "outside directors" as
defined in Treas. Reg. (S) 1.162-27(e) as promulgated by the Internal Revenue
Service and "non-employee directors" as defined in Rule 16b-3(b)(3) as
promulgated under the Exchange Act.
(e) "Company" means ZMAX Corporation, a Nevada corporation.
-------
(f) "Disability" has the same meaning as provided in the long-
----------
term disability plan or policy maintained or, if applicable, most recently
maintained, by the Company or, if applicable, any Affiliate of the Company for
the Participant. If no long-term disability plan or policy was ever maintained
on behalf of the Participant or, if the determination of Disability relates to
an Incentive Stock Option, Disability means that condition described in Code
Section 22(e)(3), as amended from time to time. In the event of a dispute, the
determination of Disability will be made by the Committee and will be supported
by advice of a physician competent in the area to which such Disability relates.
(g) "Dividend Equivalent Rights" means certain rights to receive
--------------------------
cash payments as described in Section 3.5.
(h) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended from time to time.
-1-
<PAGE>
(i) "Fair Market Value" with regard to a date means:
-----------------
(1) the average of the high and low prices at which Stock
shall have been sold on that date or the last trading
date prior to that date as reported by the Nasdaq Stock
Market (or, if applicable, as reported by a national
securities exchange selected by the Committee on which
the shares of Stock are then actively traded) and
published in The Wall Street Journal,
(2) if Stock is not traded on a securities exchange, but is
reported by the Nasdaq Stock Market and market
information is published on a regular basis in the Wall
Street Journal, the average of the published high and
low sales prices for that date or the last business day
prior to that date as published in the Wall Street
Journal,
(3) if such market information is not published on a regular
basis, the average of the high bid and low asked prices
of Stock in the over-the-counter market on that date or
the last business day prior to that date, as reported
by the Nasdaq Stock Market, or, if not so reported, by
a generally accepted reporting service, or
(4) if Stock is not publicly traded, as determined in good
faith by the Committee with due consideration being
given to (i) the most recent independent appraisal of
the Company, if such appraisal is not more than twelve
months old and (ii) the valuation methodology used in
any such appraisal provided that, for purposes of
granting awards other than Incentive Stock Options,
Fair Market Value of the shares of Stock may be
determined by the Committee by reference to the average
market value determined over a period certain or as of
specified dates, to a tender offer price for the shares
of Stock (if settlement of an award is triggered by
such an event) or to any other reasonable measure of
fair market value.
(j) "Option" means a non-qualified stock option or an incentive
------
stock option.
(k) "Over 10% Owner" means an individual who at the time an
--------------
Incentive Stock Option is granted owns Stock possessing more than 10% of the
total combined voting power of the Company or one of its Subsidiaries,
determined by applying the attribution rules of Code Section 424(d).
-2-
<PAGE>
(l) "Participant" means an individual who receives a Stock
-----------
Incentive hereunder.
(m) "Performance Unit Award" refers to a performance unit award
----------------------
as described in Section 3.6.
(n) "Phantom Shares" refers to the rights described in Section
--------------
3.7.
(o) "Plan" means the ZMAX Corporation 1997 Stock Incentive Plan.
----
(p) "Stock" means the Company's common stock.
-----
(q) "Stock Appreciation Right" means a stock appreciation right
------------------------
described in Section 3.3.
(r) "Stock Award" means a stock award described in Section 3.4.
-----------
(s) "Stock Incentive Agreement" means an agreement between the
-------------------------
Company and a Participant or other documentation evidencing an award of a Stock
Incentive.
(t) "Stock Incentive Program" means a written program established
-----------------------
by the Committee, pursuant to which Stock Incentives are awarded under the Plan
under uniform terms, conditions and restrictions set forth in such written
program.
(u) "Stock Incentives" means, collectively, Dividend Equivalent
----------------
Rights, Incentive Stock Options, Non-Qualified Stock Options, Phantom Shares,
Stock Appreciation Rights and Stock Awards.
(v) "Subsidiary" means any corporation (other than the Company)
----------
in an unbroken chain of corporations beginning with the Company if, with respect
to Incentive Stock Options, at the time of the granting of the Option, each of
the corporations other than the last corporation in the unbroken chain owns
stock possessing 50% or more of the total combined voting power of all classes
of stock in one of the other corporations in the chain.
(w) "Termination of Employment" means the termination of the
-------------------------
employee-employer relationship between a Participant and the Company and its
Affiliates, regardless of whether severance or similar payments are made to the
Participant for any reason, including, but not by way of limitation, a
termination by resignation, discharge, death, Disability or retirement. The
Committee will, in its absolute discretion, determine the effect of all matters
and questions relating to a Termination of Employment, including, but not by way
of limitation, the question of whether a leave of absence constitutes a
Termination of Employment.
-3-
<PAGE>
SECTION 2 THE STOCK INCENTIVE PLAN
2.1 Purpose of the Plan. The Plan is intended to (a) provide
-------------------
incentive to officers and key employees of the Company and its Affiliates to
stimulate their efforts toward the continued success of the Company and to
operate and manage the business in a manner that will provide for the long-term
growth and profitability of the Company; (b) encourage stock ownership by
officers and key employees by providing them with a means to acquire a
proprietary interest in the Company, acquire shares of Stock, or to receive
compensation which is based upon appreciation in the value of Stock; and (c)
provide a means of obtaining, rewarding and retaining key personnel and
consultants.
2.2 Stock Subject to the Plan. Subject to adjustment in accordance
-------------------------
with Section 5.2, 1,700,000 shares of Stock (the "Maximum Plan Shares") are
hereby reserved exclusively for issuance pursuant to Stock Incentives. At no
time may the Company have outstanding under the Plan, Stock Incentives subject
to Section 16 of the Exchange Act and shares of Stock issued in respect of Stock
Incentives under the Plan in excess of the Maximum Plan Shares. The shares of
Stock attributable to the nonvested, unpaid, unexercised, unconverted or
otherwise unsettled portion of any Stock Incentive that is forfeited or
cancelled or expires or terminates for any reason without becoming vested, paid,
exercised, converted or otherwise settled in full will again be available for
purposes of the Plan.
2.3 Administration of the Plan. The Plan is administered by the
--------------------------
Committee. The Committee has full authority in its discretion to determine the
officers and key employees of the Company or its Affiliates to whom Stock
Incentives will be granted and the terms and provisions of Stock Incentives,
subject to the Plan. Subject to the provisions of the Plan, the Committee has
full and conclusive authority to interpret the Plan; to prescribe, amend and
rescind rules and regulations relating to the Plan; to determine the terms and
provisions of the respective Stock Incentive Agreements and to make all other
determinations necessary or advisable for the proper administration of the Plan.
The Committee's determinations under the Plan need not be uniform and may be
made by it selectively among persons who receive, or are eligible to receive,
awards under the Plan (whether or not such persons are similarly situated). The
Committee's decisions are final and binding on all Participants.
2.4 Eligibility and Limits. Stock Incentives may be granted only to
----------------------
officers, and key employees and consultants of the Company, or any Affiliate of
the Company; provided, however, that an incentive stock option may only be
granted to an employee of the Company or any Subsidiary. In the case of
incentive stock options, the aggregate Fair Market Value (determined as at the
date an incentive stock option is granted) of stock with respect to which stock
options intended to meet the requirements of Code Section 422 become exercisable
for the first time by an individual during any calendar year under all plans of
the Company and its
-4-
<PAGE>
Subsidiaries may not exceed $100,000; provided further, that if the limitation
is exceeded, the incentive stock option(s) which cause the limitation to be
exceeded will be treated as non-qualified stock option(s).
SECTION 3 TERMS OF STOCK INCENTIVES
3.1 Terms and Conditions of All Stock Incentives.
--------------------------------------------
(a) The number of shares of Stock as to which a Stock Incentive
may be granted will be determined by the Committee in its sole discretion,
subject to the provisions of Section 2.2 as to the total number of shares
available for grants under the Plan and subject to the limits on Options and
Stock Appreciation Rights in the following sentence. To the extent required
under Section 162(m) of the Code and the regulations thereunder for compensation
to be treated as qualified performance based compensation, the maximum number of
shares of Stock with respect to which Options or Stock Appreciation Rights may
be granted during any one year period to any employee may not exceed 1,700,000.
(b) Each Stock Incentive will either be evidenced by a Stock
Incentive Agreement in such form and containing such terms, conditions and
restrictions as the Committee may determine to be appropriate, or be made
subject to the terms of a Stock Incentive Program, containing such terms,
conditions and restrictions as the Committee may determine to be appropriate.
Each Stock Incentive Agreement or Stock Incentive Program is subject to the
terms of the Plan and any provisions contained in the Stock Incentive Agreement
or Stock Incentive Program that are inconsistent with the Plan are null and
void.
(c) The date a Stock Incentive is granted will be the date on
which the Committee has approved the terms and conditions of the Stock Incentive
and has determined the recipient of the Stock Incentive and the number of shares
covered by the Stock Incentive, and has taken all such other actions necessary
to complete the grant of the Stock Incentive.
(d) Any Stock Incentive may be granted in connection with all or
any portion of a previously or contemporaneously granted Stock Incentive.
Exercise or vesting of a Stock Incentive granted in connection with another
Stock Incentive may result in a pro rata surrender or cancellation of any
related Stock Incentive, as specified in the applicable Stock Incentive
Agreement or Stock Incentive Program.
-5-
<PAGE>
3.2 Terms and Conditions of Options. Each Option granted under the
-------------------------------
Plan must be evidenced by a Stock Incentive Agreement. At the time any Option
is granted, the Committee will determine whether the Option is to be an
incentive stock option described in Code Section 422 or a non-qualified stock
option, and the Option must be clearly identified as to its status as an
incentive stock option or a non-qualified stock option. Incentive stock options
may only be granted to employees of the Company or any Subsidiary. At the time
any incentive stock option granted under the Plan is exercised, the Company will
be entitled to legend the certificates representing the shares of Stock
purchased pursuant to the Option to clearly identify them as representing the
shares purchased upon the exercise of an incentive stock option. An incentive
stock option may only be granted within ten (10) years from the earlier of the
date the Plan is adopted or approved by the Company's stockholders.
(a) Option Price. Subject to adjustment in accordance with
------------
Section 5.2 and the other provisions of this Section 3.2, the exercise price
(the "Exercise Price") per share of Stock purchasable under any Option must be
as set forth in the applicable Stock Incentive Agreement, but in no event may it
be less than the Fair Market Value on the date the Option is granted with
respect to an incentive stock option. With respect to each grant of an incentive
stock option to a Participant who is an Over 10% Owner, the Exercise Price may
not be less than 110% of the Fair Market Value on the date the Option is
granted. The Exercise Price of an Option may not be amended or modified after
the grant of the Option, and an Option may not be surrendered in consideration
of or exchanged for a grant of a new Option having an Exercise Price below that
of the Option which was surrendered or exchanged.
(b) Option Term. Any incentive stock option granted to a
-----------
Participant who is not an Over 10% Owner is not exercisable after the expiration
of ten (10) years after the date the Option is granted. Any incentive stock
option granted to an Over 10% Owner is not exercisable after the expiration of
five (5) years after the date the Option is granted. The term of any Non-
Qualified Stock Option must be as specified in the applicable Stock Incentive
Agreement.
(c) Payment. Payment for all shares of Stock purchased pursuant
-------
to exercise of an Option will be made in any form or manner authorized by the
Committee in the Stock Incentive Agreement or by amendment thereto, including,
but not limited to, cash or, if the Stock Incentive Agreement provides:
(i) by delivery to the Company of a number of shares of Stock
which have been owned by the holder for at least six (6)
months prior to the date of exercise having an aggregate Fair
Market Value of not less than the product of the Exercise
Price multiplied by the number of shares the Participant
intends to purchase upon exercise of the Option on the date
of delivery;
(ii) in a cashless exercise through a broker; or
-6-
<PAGE>
(iii) by having a number of shares of Stock withheld, the Fair
Market Value of which as of the date of exercise is
sufficient to satisfy the Exercise Price.
In its discretion, the Committee also may authorize (at the time an Option is
granted or thereafter) Company financing to assist the Participant as to payment
of the Exercise Price on such terms as may be offered by the Committee in its
discretion. Payment must be made at the time that the Option or any part
thereof is exercised, and no shares may be issued or delivered upon exercise of
an option until full payment has been made by the Participant. The holder of an
Option, as such, has none of the rights of a stockholder.
(d) Conditions to the Exercise of an Option. Each Option granted
---------------------------------------
under the Plan is exercisable by whom, at such time or times, or upon the
occurrence of such event or events, and in such amounts, as the Committee
specifies in the Stock Incentive Agreement; provided, however, that subsequent
to the grant of an Option, the Committee, at any time before complete
termination of such Option, may accelerate the time or times at which such
Option may be exercised in whole or in part, including, without limitation, upon
a Change in Control and may permit the Participant or any other designated
person to exercise the Option, or any portion thereof, for all or part of the
remaining Option term, notwithstanding any provision of the Stock Incentive
Agreement to the contrary.
(e) Termination of Incentive Stock Option. With respect to an
-------------------------------------
incentive stock option, in the event of termination of employment of a
Participant, the Option or portion thereof held by the Participant which is
unexercised will expire, terminate, and become unexercisable no later than the
expiration of three (3) months after the date of termination of employment;
provided, however, that in the case of a holder whose termination of employment
is due to death or Disability, one (1) year will be substituted for such three
(3) month period; provided, further that such time limits may be exceeded by the
Committee under the terms of the grant, in which case, the incentive stock
option will be a nonqualified option if it is exercised after the time limits
that would otherwise apply. For purposes of this Subsection (e), termination of
employment of the Participant will not be deemed to have occurred if the
Participant is employed by another corporation (or a parent or subsidiary
corporation of such other corporation) which has assumed the incentive stock
option of the Participant in a transaction to which Code Section 424(a) is
applicable.
(f) Special Provisions for Certain Substitute Options.
-------------------------------------------------
Notwithstanding anything to the contrary in this Section 3.2, any Option issued
in substitution for an option previously issued by another entity, which
substitution occurs in connection with a transaction to which Code Section
424(a) is applicable, may provide for an exercise price computed in accordance
with such Code Section and the regulations thereunder and may contain such other
terms and conditions as the Committee may prescribe to cause such substitute
Option to contain as nearly as possible the same terms and conditions (including
the applicable vesting and termination provisions) as those contained in the
previously issued option being replaced thereby.
-7-
<PAGE>
3.3 Terms and Conditions of Stock Appreciation Rights. Each Stock
-------------------------------------------------
Appreciation Right granted under the Plan must be evidenced by a Stock Incentive
Agreement. A Stock Appreciation Right entitles the Participant to receive the
excess of (1) the Fair Market Value of a specified or determinable number of
shares of the Stock at the time of payment or exercise over (2) a specified or
determinable price which, in the case of a Stock Appreciation Right granted in
connection with an Option, may not be less than the Exercise Price for that
number of shares subject to that Option. A Stock Appreciation Right granted in
connection with a Stock Incentive may only be exercised to the extent that the
related Stock Incentive has not been exercised, paid or otherwise settled.
(a) Settlement. Upon settlement of a Stock Appreciation Right, the
----------
Company must pay to the Participant the appreciation in cash or shares of Stock
(valued at the aggregate Fair Market Value on the date of payment or exercise)
as provided in the Stock Incentive Agreement or, in the absence of such
provision, as the Committee may determine.
(b) Conditions to Exercise. Each Stock Appreciation Right granted
----------------------
under the Plan is exercisable or payable at such time or times, or upon the
occurrence of such event or events, and in such amounts, as the Committee
specifies in the Stock Incentive Agreement; provided, however, that subsequent
to the grant of a Stock Appreciation Right, the Committee, at any time before
complete termination of such Stock Appreciation Right, may accelerate the time
or times at which such Stock Appreciation Right may be exercised or paid in
whole or in part.
3.4 Terms and Conditions of Stock Awards. The number of shares of Stock
------------------------------------
subject to a Stock Award and restrictions or conditions on such shares, if any,
will be as the Committee determines, and the certificate for such shares will
bear evidence of any restrictions or conditions. Subsequent to the date of the
grant of the Stock Award, the Committee has the power to permit, in its
discretion, an acceleration of the expiration of an applicable restriction
period with respect to any part or all of the shares awarded to a Participant.
The Committee may require a cash payment from the Participant in an amount no
greater than the aggregate Fair Market Value of the shares of Stock awarded
determined at the date of grant in exchange for the grant of a Stock Award or
may grant a Stock Award without the requirement of a cash payment.
3.5 Terms and Conditions of Dividend Equivalent Rights. A Dividend
--------------------------------------------------
Equivalent Right entitles the Participant to receive payments from the Company
in an amount determined by reference to any cash dividends paid on a specified
number of shares of Stock to Company stockholders of record during the period
such rights are effective. The Committee may impose such restrictions and
conditions on any Dividend Equivalent Right as the Committee in its discretion
shall determine, including the date any such right shall terminate and may
reserve the right to terminate, amend or suspend any such right at any time.
-8-
<PAGE>
(a) Payment. Payment in respect of a Dividend Equivalent Right may be
-------
made by the Company in cash or shares of Stock (valued at Fair Market Value on
the date of payment) as provided in the Stock Incentive Agreement or Stock
Incentive Program, or, in the absence of such provision, as the Committee may
determine.
(b) Conditions to Payment. Each Dividend Equivalent Right granted
---------------------
under the Plan is payable at such time or times, or upon the occurrence of such
event or events, and in such amounts, as the Committee specifies in the
applicable Stock Incentive Agreement or Stock Incentive Program; provided,
however, that subsequent to the grant of a Dividend Equivalent Right, the
Committee, at any time before complete termination of such Dividend Equivalent
Right, may accelerate the time or times at which such Dividend Equivalent Right
may be paid in whole or in part.
3.6 Terms and Conditions of Performance Unit Awards. A Performance Unit
-----------------------------------------------
Award shall entitle the Participant to receive, at a specified future date,
payment of an amount equal to all or a portion of the value of a specified or
determinable number of units (stated in terms of a designated or determinable
dollar amount per unit) granted by the Committee. At the time of the grant, the
Committee must determine the base value of each unit, the number of units
subject to a Performance Unit Award, the performance factors applicable to the
determination of the ultimate payment value of the Performance Unit Award and
the period over which Company performance shall be measured. The Committee may
provide for an alternate base value for each unit under certain specified
conditions.
(a) Payment. Payment in respect of Performance Unit Awards may be
-------
made by the Company in cash or shares of Stock (valued at Fair Market Value on
the date of payment) as provided in the applicable Stock Incentive Agreement or
Stock Incentive Program or, in the absence of such provision, as the Committee
may determine.
(b) Conditions to Payment. Each Performance Unit Award granted under
---------------------
the Plan shall be payable at such time or times, or upon the occurrence of such
event or events, and in such amounts, as the Committee shall specify in the
applicable Stock Incentive Agreement or Stock Incentive Program; provided,
however, that subsequent to the grant of a Performance Unit Award, the
Committee, at any time before complete termination of such Performance Unit
Award, may accelerate the time or times at which such Performance Unit Award may
be paid in whole or in part.
3.7 Terms and Conditions of Phantom Shares. Phantom Shares shall entitle
--------------------------------------
the Participant to receive, at a specified future date, payment of an amount
equal to all or a portion of the Fair Market Value of a specified number of
shares of Stock at the end of a specified period. At the time of the grant, the
Committee will determine the factors which will govern the portion of the rights
so payable, including, at the discretion of the Committee, any performance
criteria that must be satisfied as a condition to payment. Phantom Share awards
containing performance criteria may be designated as Performance Share Awards.
-9-
<PAGE>
(a) Payment. Payment in respect of Phantom Shares may be made by the
-------
Company in cash or shares of Stock (valued at Fair Market Value on the date of
payment) as provided in the applicable Stock Incentive Agreement or Stock
Incentive Program, or, in the absence of such provision, as the Committee may
determine.
(b) Conditions to Payment. Each Phantom Share granted under the Plan
---------------------
is payable at such time or times, or upon the occurrence of such event or
events, and in such amounts, as the Committee specify in the applicable Stock
Incentive Agreement or Stock Incentive Program; provided, however, that
subsequent to the grant of a Phantom Share, the Committee, at any time before
complete termination of such Phantom Share, may accelerate the time or times at
which such Phantom Share may be paid in whole or in part.
3.8 Treatment of Awards Upon Termination of Employment. Except as
--------------------------------------------------
otherwise provided by Plan Section 3.2(e), any award under this Plan to a
Participant who has experienced a Termination of Employment may be cancelled,
accelerated, paid or continued, as provided in the applicable Stock Incentive
Agreement or Stock Incentive Program, or, in the absence of such provision, as
the Committee may determine. The portion of any award exercisable in the event
of continuation or the amount of any payment due under a continued award may be
adjusted by the Committee to reflect the Participant's period of service from
the date of grant through the date of the Participant's Termination of
Employment or such other factors as the Committee determines are relevant to its
decision to continue the award.
SECTION 4 RESTRICTIONS ON STOCK
4.1 Escrow of Shares. Any certificates representing the shares of Stock
----------------
issued under the Plan will be issued in the Participant's name, but, if the
applicable Stock Incentive Agreement or Stock Incentive Program so provides, the
shares of Stock will be held by a custodian designated by the Committee (the
"Custodian"). Each applicable Stock Incentive Agreement or Stock Incentive
Program providing for transfer of shares of Stock to the Custodian must appoint
the Custodian as the attorney-in-fact for the Participant for the term specified
in the applicable Stock Incentive Agreement or Stock Incentive Program, with
full power and authority in the Participant's name, place and stead to transfer,
assign and convey to the Company any shares of Stock held by the Custodian for
such Participant, if the Participant forfeits the shares under the terms of the
applicable Stock Incentive Agreement or Stock Incentive Program. During the
period that the Custodian holds the shares subject to this Section, the
Participant is entitled to all rights, except as provided in the applicable
Stock Incentive Agreement or Stock Incentive Program, applicable to shares of
Stock not so held. Any dividends declared on shares of Stock held by the
Custodian must provide in the applicable Stock Incentive Agreement or Stock
Incentive Program, be paid directly to the Participant or, in the alternative,
be retained by the Custodian or by the Company until the expiration of the term
specified in the applicable Stock Incentive Agreement or Stock Incentive Program
and shall then
-10-
<PAGE>
be delivered, together with any proceeds, with the shares of Stock to the
Participant or to the Company, as applicable.
4.2 Restrictions on Transfer. The Participant does not have the right to
------------------------
make or permit to exist any disposition of the shares of Stock issued pursuant
to the Plan except as provided in the Plan or the applicable Stock Incentive
Agreement or Stock Incentive Program. Any disposition of the shares of Stock
issued under the Plan by the Participant not made in accordance with the Plan or
the applicable Stock Incentive Agreement or Stock Incentive Program will be
void. The Company will not recognize, or have the duty to recognize, any
disposition not made in accordance with the Plan and the applicable Stock
Incentive Agreement or Stock Incentive Program, and the shares so transferred
will continue to be bound by the Plan and the applicable Stock Incentive
Agreement or Stock Incentive Program.
SECTION 5 GENERAL PROVISIONS
5.1 Withholding. The Company must deduct from all cash distributions
-----------
under the Plan any taxes required to be withheld by federal, state or local
government. Whenever the Company proposes or is required to issue or transfer
shares of Stock under the Plan or upon the vesting of any Stock Award, the
Company has the right to require the recipient to remit to the Company an amount
sufficient to satisfy any federal, state and local withholding tax requirements
prior to the delivery of any certificate or certificates for such shares or the
vesting of such Stock Award. A Participant may pay the withholding tax in cash,
or, if the applicable Stock Incentive Agreement or Stock Incentive Program
provides, a Participant may elect to have the number of shares of Stock he is to
receive reduced by, or with respect to a Stock Award, tender back to the
Company, the smallest number of whole shares of Stock which, when multiplied by
the Fair Market Value of the shares of Stock determined as of the Tax Date
(defined below), is sufficient to satisfy federal, state and local, if any,
withholding taxes arising from exercise or payment of a Stock Incentive (a
"Withholding Election"). A Participant may make a Withholding Election only if
both of the following conditions are met:
(a) The Withholding Election must be made on or prior to the date on
which the amount of tax required to be withheld is determined (the "Tax Date")
by executing and delivering to the Company a properly completed notice of
Withholding Election as prescribed by the Committee; and
(b) Any Withholding Election made will be irrevocable except on six
months advance written notice delivered to the Company; however, the Committee
may in its sole discretion disapprove and give no effect to the Withholding
Election.
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<PAGE>
5.2 Changes in Capitalization; Merger; Liquidation.
----------------------------------------------
(a) The number of shares of Stock reserved for the grant of Options,
Dividend Equivalent Rights, Performance Unit Awards, Phantom Shares, Stock
Appreciation Rights and Stock Awards; the number of shares of Stock reserved for
issuance upon the exercise or payment, as applicable, of each outstanding
Option, Dividend Equivalent Right, Phantom Share and Stock Appreciation Right
and upon vesting or grant, as applicable, of each Stock Award; the Exercise
Price of each outstanding Option and the specified number of shares of Stock to
which each outstanding Dividend Equivalent Right, Phantom Share and Stock
Appreciation Right pertains must be proportionately adjusted for any increase or
decrease in the number of issued shares of Stock resulting from a subdivision or
combination of shares or the payment of a stock dividend in shares of Stock to
holders of outstanding shares of Stock or any other increase or decrease in the
number of shares of Stock outstanding effected without receipt of consideration
by the Company.
(b) In the event of a merger, consolidation or other reorganization of
the Company or tender offer for shares of Stock, the Committee may make such
adjustments with respect to awards and take such other action as it deems
necessary or appropriate to reflect such merger, consolidation, reorganization
or tender offer, including, without limitation, the substitution of new awards,
or the adjustment of outstanding awards, the acceleration of awards, the removal
of restrictions on outstanding awards, or the termination of outstanding awards
in exchange for the cash value determined in good faith by the Committee of the
vested portion of the award. Any adjustment pursuant to this Section 5.2 may
provide, in the Committee's discretion, for the elimination without payment
therefor of any fractional shares that might otherwise become subject to any
Stock Incentive, but except as set forth in this Section may not otherwise
diminish the then value of the Stock Incentive.
(c) The existence of the Plan and the Stock Incentives granted
pursuant to the Plan must not affect in any way the right or power of the
Company to make or authorize any adjustment, reclassification, reorganization or
other change in its capital or business structure, any merger or consolidation
of the Company, any issue of debt or equity securities having preferences or
priorities as to the Stock or the rights thereof, the dissolution or liquidation
of the Company, any sale or transfer of all or any part of its business or
assets, or any other corporate act or proceeding.
5.3 Cash Awards. The Committee may, at any time and in its discretion,
-----------
grant to any holder of a Stock Incentive the right to receive, at such times and
in such amounts as determined by the Committee in its discretion, a cash amount
which is intended to reimburse such person for all or a portion of the federal,
state and local income taxes imposed upon such person as a consequence of the
receipt of the Stock Incentive or the exercise of rights thereunder.
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<PAGE>
5.4 Compliance with Code. All incentive stock options to be granted
--------------------
hereunder are intended to comply with Code Section 422, and all provisions of
the Plan and all incentive stock options granted hereunder must be construed in
such manner as to effectuate that intent.
5.5 Right to Terminate Employment. Nothing in the Plan or in any Stock
-----------------------------
Incentive confers upon any Participant the right to continue as an employee or
officer of the Company or any of its Affiliates or affect the right of the
Company or any of its Affiliates to terminate the Participant's employment at
any time.
5.6 Non-alienation of Benefits. Other than as specifically provided with
--------------------------
regard to the death of a Participant, no benefit under the Plan may be subject
in any manner to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance or charge; and any attempt to do so shall be void. No such benefit
may, prior to receipt by the Participant, be in any manner liable for or subject
to the debts, contracts, liabilities, engagements or torts of the Participant.
5.7 Restrictions on Delivery and Sale of Shares; Legends. Each Stock
----------------------------------------------------
Incentive is subject to the condition that if at any time the Committee, in its
discretion, shall determine that the listing, registration or qualification of
the shares covered by such Stock Incentive upon any securities exchange or under
any state or federal law is necessary or desirable as a condition of or in
connection with the granting of such Stock Incentive or the purchase or delivery
of shares thereunder, the delivery of any or all shares pursuant to such Stock
Incentive may be withheld unless and until such listing, registration or
qualification shall have been effected. If a registration statement is not in
effect under the Securities Act of 1933 or any applicable state securities laws
with respect to the shares of Stock purchasable or otherwise deliverable under
Stock Incentives then outstanding, the Committee may require, as a condition of
exercise of any Option or as a condition to any other delivery of Stock pursuant
to a Stock Incentive, that the Participant or other recipient of a Stock
Incentive represent, in writing, that the shares received pursuant to the Stock
Incentive are being acquired for investment and not with a view to distribution
and agree that the shares will not be disposed of except pursuant to an
effective registration statement, unless the Company shall have received an
opinion of counsel that such disposition is exempt from such requirement under
the Securities Act of 1933 and any applicable state securities laws. The
Company may include on certificates representing shares delivered pursuant to a
Stock Incentive such legends referring to the foregoing representations or
restrictions or any other applicable restrictions on resale as the Company, in
its discretion, shall deem appropriate.
5.8 Listing and Legal Compliance. The Committee may suspend the exercise
----------------------------
or payment of any Stock Incentive so long as it determines that securities
exchange listing or registration or qualification under any securities laws is
required in connection therewith and has not been completed on terms acceptable
to the Committee.
5.9 Termination and Amendment of the Plan. The Board of Directors at any
-------------------------------------
time may amend or terminate the Plan without stockholder approval; provided,
however, that the
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<PAGE>
Board of Directors may condition any amendment on the approval of stockholders
of the Company if such approval is necessary or advisable with respect to tax,
securities or other applicable laws. No such termination or amendment without
the consent of the holder of a Stock Incentive may adversely affect the rights
of the Participant under such Stock Incentive.
5.10 Stockholder Approval. The Plan must be submitted to the stockholders
--------------------
of the Company for their approval within twelve (12) months before or after the
adoption of the Plan by the Board of Directors of the Company. If such approval
is not obtained, any Stock Incentive granted hereunder will be void.
5.11 Choice of Law. The laws of the State of Maryland govern the Plan, to
-------------
the extent not preempted by federal law, without reference to the principles of
conflict of laws.
5.12 Effective Date of Plan. The Plan shall become effective April 17,
----------------------
1997, subject, however, to the approval of the Plan by the Company's
shareholders. Stock Incentives granted hereunder prior to such approval shall
be conditioned upon such approval. Unless such approval is obtained within one
year after the effective date of this Plan and any Stock Incentives awarded
hereunder shall become void thereafter.
ZMAX CORPORATION
By: /s/ Michael C. Higgins
---------------------------
Michael C. Higgins
President
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<PAGE>
Exhibit 10.2
ZMAX CORPORATION
NON-QUALIFIED STOCK OPTION AWARD
THIS AWARD is made as of the Grant Date, by ZMAX CORPORATION (the
"Company") to __________________ (the "Optionee").
Upon and subject to the Terms and Conditions attached hereto and
incorporated herein by reference, the Company hereby awards as of the Grant Date
to Optionee a non-qualified stock option (the "Option"), as described below, to
purchase the Option Shares.
A. Grant Date: ______________.
----------
B. Type of Option: Non-Qualified Stock Option.
--------------
C. Plan (under which Option is granted): ZMAX Corporation 1997 Stock
------------------------------------
Incentive Plan.
D. Option Shares: All or any part of _______ shares of the Company's
-------------
common stock (the "Common Stock").
E. Exercise Price: $_____ per share.
--------------
F. Exercise Period: Subject to such shorter period provided in the
---------------
attached Terms and Conditions, the Option may be exercised during the
Exercise Period which commences on the Grant Date and ends no later
than at the close of business on the tenth (10th) anniversary of the
Grant Date, provided that the Option may be exercised as to no more
than the vested Option Shares, determined pursuant to the Vesting
Schedule. Note that other restrictions to exercising the Option, as
described in the attached Terms and Conditions, may apply.
G. Vesting Schedule: See Schedule A (attached)
---------------- ----------
H. Shareholder Approval: Options granted hereunder, prior to approval of
--------------------
the Plan by the Company's shareholders, are conditioned upon such
approval and if such approval is not obtained, all Options granted
hereunder will become void.
IN WITNESS WHEREOF, the Company has executed and sealed this Award as of
the Grant Date set forth above.
ZMAX CORPORATION
By:
---------------------------
G. W. Norman Wareham
Vice President
Page 1 of 6
<PAGE>
TERMS AND CONDITIONS
TO THE
ZMAX CORPORATION
NON-QUALIFIED STOCK OPTION AWARD
1. Exercise of Option. Subject to the provisions provided herein or in
------------------
the Award made pursuant to the ZMAX Corporation 1997 Stock Incentive Plan.
(a) The Option may be exercised with respect to all or any portion of
the vested Option Shares at any time during the Exercise Period by the
delivery to the Company, at its principal place of business, of (i) a
written notice of exercise in substantially the form attached hereto as
Exhibit 1, which shall be actually delivered to the Company no earlier than
---------
thirty (30) days and no later than ten (10) days prior to the date upon
which Optionee desires to exercise all or any portion of the Option and
(ii) payment to the Company of the Exercise Price multiplied by the number
-------------
of shares being purchased (the "Purchase Price") in the manner provided in
Subsection (b), and (iii) payment, in accordance with Section 3, of the
withholding liability arising from the exercise. Upon acceptance of such
notice and receipt of payment in full of the Purchase Price and withholding
liability, the Company shall cause to be issued a certificate representing
the Option Shares purchased.
(b) The Purchase Price shall be paid in full upon the exercise of an
Option and no Option Shares shall be issued or delivered until full payment
therefor has been made. Payment of the Purchase Price for all Option
Shares purchased pursuant to the exercise of an Option shall be made in
cash or, alternatively, as follows:
(i) by delivery to the Company of a number of shares of Common
Stock which have been owned by the Optionee for at least six months
prior to the date of the Option's exercise, having a Fair Market
Value, as determined under the Plan, on the date of exercise either
equal to the Purchase Price or in combination with cash to equal the
Purchase Price; or
(ii) by receipt of the Purchase Price in cash from a broker,
dealer or other "creditor" as defined by Regulation T issued by the
Board of Governors of the Federal Reserve System following delivery by
the Optionee to the Committee (defined in the Plan) of instructions in
a form acceptable to the Committee regarding delivery to such broker,
dealer or other creditor of that number of Option Shares with respect
to which the Option is exercised.
2. Exercise Price. The exercise price for each Option Share shall be
--------------
$14.31, subject to adjustment as set forth in Section 7 below (the "Exercise
Price").
Page 2 of 6
<PAGE>
3. Withholding. The Optionee must satisfy his federal, state and local,
-----------
if any, withholding taxes imposed by reason of the exercise of the Option either
by paying to the Company the full amount of the withholding obligation (i) in
cash, (ii) by electing, irrevocably and in writing in substantially the form
attached hereto as Exhibit 2 (a "Withholding Election"), to have the actual
---------
number of shares of Common Stock issuable upon exercise reduced by the smallest
number of whole shares of Common Stock which, when multiplied by the fair market
value of the Common Stock as of the date the Option is exercised, is sufficient
to satisfy the amount of withholding tax; or (iii) by any combination of the
above. Optionee may make a Withholding Election only if the following
conditions are met:
(a) the Withholding Election is made by executing and delivering to
the Company a properly completed Notice of Withholding Election in
substantially the form of Exhibit 2 attached hereto;
(b) the Withholding Election is delivered to the Company sufficiently
in advance of the date on which the amount of tax required to be withheld
is determined (the "Tax Date") as the Committee under the Plan (the
"Committee") determines is necessary or appropriate to satisfy the
conditions of the exemptions provided under Rule 16b-3 promulgated under
the Securities Exchange Act of 1934 (the "1934 Act");
(c) any Withholding Election is irrevocably given in a manner that
satisfies the requirements of the exemption provided under Rule 16b-3
promulgated under the 1934 Act; and
(d) if the Optionee is considered by the Committee not to be subject
to Section 16 of the 1934 Act, the Withholding Election is made no later
than the Tax Date.
Notwithstanding anything to the contrary herein, the Committee may in its
sole discretion disapprove and give no effect to any Withholding Election.
4. Term and Termination of Option. The Option shall terminate on the
------------------------------
earliest of (i) the last day of the Exercise Period, (ii) as of the date which
is one year after the Optionee's Termination of Employment (as defined in the
Plan) with the Company or a Subsidiary (as defined in the Plan), except if the
Termination of Employment is for "Cause" as defined below, (iii) as of the date
which is one year after the Optionee's death or Disability (as defined in the
Plan), (iv) as of the time of Termination of Employment for Cause, or (v) as of
the time the Optionee breaches the provisions of any confidentiality,
noncompetition, or nonsolicitation agreement with the Company or a Subsidiary,
whether pursuant to an employment or consulting agreement or otherwise. Upon
the termination of the Option, this Option and all unexercised rights granted to
Optionee hereunder shall terminate, and thereafter be null and void.
"Cause" means
(a) willful and continued failure (other than failure resulting from
incapacity during illness) to substantially perform duties with the
Company or a Subsidiary,
Page 3 of 6
<PAGE>
(b) any act of fraud, misappropriation, dishonesty, embezzlement or
similar conduct against the Company or a Subsidiary, as determined by
the Committee,
(c) conviction for a felony or any other crime involving moral turpitude,
or
(d) "Cause" or words of similar impart as defined or determined pursuant
to any employment or consulting agreement between the Optionee and the
Company or a Subsidiary.
5. Rights as Shareholder. Until the stock certificates reflecting the
---------------------
Option Shares accruing to the Optionee upon exercise of the Option are issued to
the Optionee, the Optionee shall have no rights as a shareholder with respect to
such Option Shares. The Company shall make no adjustment for any dividends or
distributions or other rights on or with respect to Option Shares for which the
record date is prior to the issuance of that stock certificate, except as the
Plan or this Award otherwise provides.
6. Restriction on Transfer of Option. The Option evidenced hereby is
---------------------------------
nontransferable other than by will or the laws of descent and distribution, and,
shall be exercisable during the lifetime of the Optionee only by the Optionee
(or in the event of his disability, by his legal representative) and after his
death, only by legal representative of the Optionee's estate.
7. Changes in Capitalization; Merger; Reorganization.
-------------------------------------------------
(a) The number of Option Shares and the Exercise Price shall be
proportionately adjusted for any increase or decrease in the number of
issued shares of Common Stock resulting from a subdivision or combination
of shares or the payment of a stock dividend in shares of Common Stock to
holders of outstanding shares of Common Stock or any other increase or
decrease in the number of shares of Common Stock outstanding effected
without receipt of consideration by the Company.
(b) In the event of a merger, consolidation or other reorganization
involving the Company or a tender offer for shares of Common Stock, the
Committee may, in its sole discretion, adjust the number and class of
securities subject to the Option, with a corresponding adjustment made in
the Exercise Price; substitute a new option to replace the Option; or
accelerate the termination of the Option Period to a date prior to the
occurrence of any event specified in Section 4 above; or, terminate the
Option in consideration of payment to Optionee of the excess of the then
Fair Market Value (as defined in the Plan) of the vested Option Shares over
the Exercise Price of the vested Option Shares.
(c) The existence of the Plan and this Award shall not affect in any
way the right or power of the Company to make or authorize any adjustment,
reclassification, reorganization or other change in its capital or business
structure, any merger or consolidation of the Company, any issue of debt or
equity securities having preferences or priorities as to the Common Stock
or the rights thereof, the dissolution or liquidation of
Page 4 of 6
<PAGE>
the Company, any sale or transfer of all or any part of its business or
assets, or any other corporate act or proceeding.
8. Special Limitations on Exercise. Any exercise of the Option is
-------------------------------
subject to the condition that if at any time the Committee, in its discretion,
shall determine that the listing, registration or qualification of the shares
covered by the Option upon any securities exchange or under any state or federal
law is necessary or desirable as a condition of or in connection with the
delivery of shares thereunder, the delivery of any or all shares pursuant to the
Option may be withheld unless and until such listing, registration or
qualification shall have been effected. The Optionee shall deliver to the
Company, prior to the exercise of the Option, such information, representations
and warranties as the Company may reasonably request in order for the Company to
be able to satisfy itself that the Option Shares being acquired in accordance
with the terms of an applicable exemption from the securities registration
requirements of applicable federal and state securities laws.
9. Shareholders Agreement. As a condition to the exercise of this
----------------------
Option, the Optionee may be required to enter into a shareholders agreement if
there is one in place to which other shareholders of the Company are a party to
at the time the Optionee wishes to exercise the Option.
10. Legend on Stock Certificates. Certificates evidencing the Option
----------------------------
Shares, to the extent appropriate at the time, shall have noted conspicuously on
the certificates a legend intended to give all persons full notice of the
existence of the conditions, restrictions, rights and obligations set forth in
this Award and in the Plan.
11. Governing Laws. This Award shall be construed, administered and
--------------
enforced according to the laws of the State of Maryland; provided, however, no
option may be exercised except, in the reasonable judgment of the Board of
Directors, in compliance with exemptions under applicable state securities laws
of the state in which the Optionee resides, and/or any other applicable
securities laws.
12. Successors. This Award shall be binding upon and inure to the benefit
----------
of the heirs, legal representatives, successors and permitted assigns of the
parties.
13. Notice. Except as otherwise specified herein, all notices and other
------
communications under this Award shall be in writing and shall be deemed to have
been given if personally delivered or if sent by registered or certified United
States mail, return receipt requested, postage prepaid, addressed to the
proposed recipient at the last known address of the recipient. Any party may
designate any other address to which notices shall be sent by giving notice of
the address to the other parties in the same manner as provided herein.
14. Severability. In the event that any one or more of the provisions or
------------
portion thereof contained in this Award shall for any reason be held to be
invalid, illegal or unenforceable in any respect, the same shall not invalidate
or otherwise affect any other provisions of this Award, and this Award shall be
construed as if the invalid, illegal or unenforceable provision or portion
thereof had never been contained herein.
Page 5 of 6
<PAGE>
15. Entire Agreement. Subject to the terms and conditions of the Plan,
----------------
this Award expresses the entire understanding and agreement of the parties.
This Award may be executed in two or more counterparts, each of which shall be
deemed an original but all of which shall constitute one and the same
instrument.
16. Violation. Any transfer, pledge, sale, assignment, or hypothecation
---------
of the Option or any portion thereof shall be a violation of the terms of this
Award and shall be void and without effect.
17. Headings. Paragraph headings used herein are for convenience of
--------
reference only and shall not be considered in construing this Award.
18. Specific Performance. In the event of any actual or threatened
--------------------
default in, or breach of, any of the terms, conditions and provisions of this
Award, the party or parties who are thereby aggrieved shall have the right to
specific performance and injunction in addition to any and all other rights and
remedies at law or in equity, and all such rights and remedies shall be
cumulative.
19. No Right to Continued Employment. Neither the establishment of the
--------------------------------
Plan nor the award of Option Shares hereunder shall be construed as giving the
Optionee the right to continued employment.
Page 6 of 6
<PAGE>
EXHIBIT 1
---------
NOTICE OF EXERCISE OF
STOCK OPTION TO PURCHASE
COMMON STOCK OF
ZMAX CORPORATION
Name___________________________
Address________________________
_______________________________
Date___________________________
ZMAX Corporation
2051 Century Boulevard
Germantown, Maryland 20874
Attn: Chief Financial Officer
Re: Exercise of Non-Qualified Stock Option
Gentlemen:
Subject to acceptance hereof in writing by ZMAX Corporation (the "Company")
pursuant to the provisions of the ZMAX Corporation 1997 Stock Incentive Plan, I
hereby give at least ten days but not more than thirty days prior notice of my
election to exercise options granted to me to purchase ______________ shares of
Common Stock of the Company under the Non-Qualified Stock Option Award (the
"Award") pursuant to the ZMAX Corporation 1997 Stock Incentive Plan dated as of
____________. The purchase shall take place as of __________, 199__ (the
"Exercise Date").
On or before the Exercise Date, I will pay the applicable purchase price as
follows:
[_] by delivery of cash or a certified check for $___________ for the full
purchase price payable to the order of ZMAX Corporation.
[_] by delivery of a certified check for $___________ representing a
portion of the purchase price with the balance to consist of shares of
Common Stock that I have owned for at least six months and that are
represented by a stock certificate I will surrender to the Company
with my endorsement. If the number of shares of Common Stock
represented by such stock certificate exceed the number to be applied
against the purchase price, I understand that a new stock certificate
will be issued to me reflecting the excess number of shares.
EXHIBIT 1 to Non-Qualified Stock Option Award - Page 1
<PAGE>
[_] by delivery of a stock certificate representing shares of Common Stock
that I have owned for at least six months which I will surrender to
the Company with my endorsement as payment of the purchase price. If
the number of shares of Common Stock represented by such certificate
exceed the number to be applied against the purchase price, I
understand that a new certificate will be issued to me reflecting the
excess number of shares.
[_] by delivery of the purchase price by ________________, a broker,
dealer or other "creditor" as defined by Regulation T issued by the
Board of Governors of the Federal Reserve System. I hereby authorize
the Company to issue a stock certificate in number of shares indicated
above in the name of said broker, dealer or other creditor or its
nominee pursuant to instructions received by the Company and to
deliver said stock certificate directly to that broker, dealer or
other creditor (or to such other party specified in the instructions
received by the Company from the broker, dealer or other creditor)
upon receipt of the purchase price.
The required federal, state and local income tax withholding obligations on
the exercise of the Award shall also be paid in cash or by certified check on or
before the Exercise Date, or will be satisfied in the manner provided in the
Withholding Election previously tendered or (if I am no longer a Section 16(b)
reporting person) to be tendered to the Company no later than the indicated date
of purchase.
As soon as the stock certificate is registered in my name, please deliver
it to me at the above address.
If the Common Stock being acquired is not registered for issuance to and
resale by the Optionee pursuant to an effective registration statement on Form
S-8 (or successor form) filed under the Securities Act of 1933, as amended (the
"1933 Act"), I hereby represent, warrant, covenant, and agree with the Company
as follows:
The shares of the Common Stock being acquired by me will be acquired
for my own account without the participation of any other person, with the
intent of holding the Common Stock for investment and without the intent of
participating, directly or indirectly, in a distribution of the Common
Stock and not with a view to, or for resale in connection with, any
distribution of the Common Stock, nor am I aware of the existence of any
distribution of the Common Stock;
I am not acquiring the Common Stock based upon any representation,
oral or written, by any person with respect to the future value of, or
income from, the Common Stock but rather upon an independent examination
and judgment as to the prospects of the Company;
The Common Stock was not offered to me by means of publicly
disseminated advertisements or sales literature, nor am I aware of any
offers made to other persons by such means;
EXHIBIT 1 to Non-Qualified Stock Option Award - Page 2
<PAGE>
I am able to bear the economic risks of the investment in the Common
Stock, including the risk of a complete loss of my investment therein;
I understand and agree that the Common Stock will be issued and sold
to me without registration under any state law relating to the registration
of securities for sale, and will be issued and sold in reliance on the
exemptions from registration under the 1933 Act, provided by Sections 3(b)
and/or 4(2) thereof and the rules and regulations promulgated thereunder;
The Common Stock cannot be offered for sale, sold or transferred by me
other than pursuant to: (A) an effective registration under the 1933 Act or
in a transaction otherwise in compliance with the 1933 Act; and (B)
evidence satisfactory to the Company of compliance with the applicable
securities laws of other jurisdictions. The Company shall be entitled to
rely upon an opinion of counsel satisfactory to it with respect to
compliance with the above laws;
The Company will be under no obligation to register the Common Stock
or to comply with any exemption available for sale of the Common Stock
without registration or filing, and the information or conditions necessary
to permit routine sales of securities of the Company under Rule 144 under
the 1933 Act are not now available and no assurance has been given that it
or they will become available. The Company is under no obligation to act
in any manner so as to make Rule 144 available with respect to the Common
Stock;
I have and have had complete access to and the opportunity to review
and make copies of all material documents related to the business of the
Company, including, but not limited to, contracts, financial statements,
tax returns, leases, deeds and other books and records. I have examined
such of these documents as I wished and am familiar with the business and
affairs of the Company. I realize that the purchase of the Common Stock is
a speculative investment and that any possible profit therefrom is
uncertain;
I have had the opportunity to ask questions of and receive answers
from the Company and any person acting on its behalf and to obtain all
material information reasonably available with respect to the Company and
its affairs. I have received all information and data with respect to the
Company which I have requested and which I have deemed relevant in
connection with the evaluation of the merits and risks of my investment in
the Company;
I have such knowledge and experience in financial and business matters
that I am capable of evaluating the merits and risks of the purchase of the
Common Stock hereunder and I am able to bear the economic risk of such
purchase; and
The agreements, representations, warranties and covenants made by me
herein extend to and apply to all of the Common Stock of the Company issued
to me pursuant to this Award. Acceptance by me of the certificate
representing such Common Stock shall
EXHIBIT 1 to Non-Qualified Stock Option Award - Page 3
<PAGE>
constitute a confirmation by me that all such agreements, representations,
warranties and covenants made herein shall be true and correct at that
time.
I understand that the certificates representing the shares being purchased
by me in accordance with this notice shall bear a legend referring to the
foregoing covenants, representations and warranties and restrictions on
transfer, and I agree that a legend to that effect may be placed on any
certificate which may be issued to me as a substitute for the certificates being
acquired by me in accordance with this notice.
Very truly yours,
-----------------------------------
AGREED TO AND ACCEPTED:
ZMAX CORPORATION
By:
------------------------------
Title:
---------------------------
Number of Shares
Exercised:
-----------------------
Number of Shares
Remaining: Date:
----------------------- --------------------------------
EXHIBIT 1 to Non-Qualified Stock Option Award - Page 4
<PAGE>
EXHIBIT 2
---------
NOTICE OF WITHHOLDING ELECTION
ZMAX CORPORATION
1997 STOCK INCENTIVE PLAN
TO: ZMAX Corporation
Attn: Chief Financial Officer
FROM:
RE: Withholding Election
- --------------------------------------------------------------------------------
This election relates to the Option identified in Paragraph 3 below. I
hereby certify that:
(1) My correct name and social security number and my current address are
set forth at the end of this document.
(2) I am (check one, whichever is applicable).
[_] the original recipient of the Option.
[_] the legal representative of the estate of the original recipient
of the Option.
[_] a legatee of the original recipient of the Option.
[_] the legal guardian of the original recipient of the Option.
(3) The Option pursuant to which this election relates was issued under
the ZMAX Corporation 1997 Stock Incentive Plan (the "Plan") in the
name of ____________________________ for the purchase of a total of
____________ shares of Common Stock. This election relates to
____________ shares of Common Stock issuable upon exercise of the
Option (the "Common Stock"), provided that the numbers set forth above
shall be deemed changed as appropriate to reflect the applicable Plan
provisions.
(4) In connection with any exercise of the Option with respect to the
Common Stock, I hereby elect to have certain of the shares issuable
pursuant to the exercise withheld by the Company for the purpose of
having the value of the shares applied to pay federal, state and
local, if any, taxes arising from the exercise.
EXHIBIT 2 to Non-Qualified Stock Option Award - Page 1
<PAGE>
The shares to be withheld shall have, as of the Tax Date applicable to
the exercise, a fair market value equal to the minimum statutory tax
withholding requirement under federal, state and local law in
connection with the exercise.
(5) This Withholding Election is made no later than the Tax Date and is
otherwise timely made pursuant to the Plan.
(6) I understand that this Withholding Election may not be revised,
amended or revoked by me (except in a manner that satisfies the
requirements of the exemption provided under Rule 16b-3 promulgated
under the Securities Exchange Act of 1934).
(7) I further understand that the Company shall withhold from the Common
Stock a whole number of shares of Common Stock having the value
specified in Paragraph 4 above.
(8) The plan has been made available to me by the Company, I have read and
understand the Plan and I have no reason to believe that any of the
conditions therein to the making of this Withholding Election have not
been met. Capitalized terms used in this Notice of Withholding
Election without definition shall have the meanings given to them in
the Plan.
Dated:
---------------------- ----------------------------------
Signature
----------------------------------
Name (Printed)
----------------------------------
Street Address
----------------------------------
City, State, Zip Code
EXHIBIT 2 to Non-Qualified Stock Option Award - Page 2
<PAGE>
SCHEDULE A
----------
ZMAX CORPORATION
VESTING SCHEDULE
----------------
<PAGE>
Exhibit 10.3
ZMAX CORPORATION
1997 DIRECTORS FORMULA STOCK OPTION PLAN
THIS INDENTURE is made effective the 20th day of May, 1997, by ZMAX
Corporation, a Nevada corporation (hereinafter called the "Company");
INTRODUCTION
The Company is adopting the ZMAX Corporation 1997 Directors Formula
Stock Option Plan (the "Plan") to provide nonemployee directors with non-
qualified stock options ("Options"). The Board of Directors of the Company
believes this Plan will promote personal interest in the welfare of the Company
by, and provide incentive to, the individuals who are primarily responsible both
for the regular operations of and for shaping and carrying out the long term
plans of the Company, thus facilitating the continued growth and financial
success of the Company.
<PAGE>
ZMAX CORPORATION
1997 DIRECTORS FORMULA STOCK OPTION PLAN
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 1 DEFINITIONS...................................... 1
SECTION 2 ADMINISTRATION................................... 2
SECTION 3 ELIGIBILITY...................................... 2
SECTION 4 SHARES SUBJECT TO PLAN........................... 2
SECTION 5 FORMULA AND TERMS AND CONDITIONS................. 3
SECTION 6 TERM OF PLAN..................................... 4
SECTION 7 INDEMNIFICATION OF COMMITTEE..................... 4
SECTION 8 AMENDMENT AND TERMINATION OF THE PLAN............ 4
SECTION 9 NO OBLIGATION TO EXERCISE OPTION................. 5
SECTION 10 ADJUSTMENT IN OPTION SHARES AND EXERCISE PRICE.. 5
SECTION 11 WITHHOLDING TAXES............................... 5
SECTION 12 RIGHTS AS A STOCKHOLDER......................... 6
SECTION 13 GOVERNING LAW.................................... 6
</TABLE>
-i-
<PAGE>
SECTION 1 DEFINITIONS
Wherever used herein, the masculine pronoun shall be deemed to include the
feminine, and the singular to include the plural, unless the context clearly
indicates otherwise, and the following words and phrases shall, when used
herein, have the meanings set forth below:
1.1 "Act" means the Securities Exchange Act of 1934.
---
1.2 "Agreement" means a stock option agreement, which is an agreement
---------
subject to the terms of the Plan.
1.3 "Board of Directors" means the Board of Directors of the Company.
------------------
1.4 "Code" means the Internal Revenue Code of 1986, as amended.
----
1.5 "Committee" means the committee appointed by the Board of Directors
---------
to administer the Plan.
1.6 "Director" means a director of the Company.
--------
1.7 "Disability" means a condition described in Code Section 22(e)(3), as
----------
amended from time to time. In the event of a dispute, the determination of
Disability will be made by the Committee and must be supported by advice of a
physician competent in the area to which such Disability relates.
1.8 "Employee" means any person who is employed by the Company or a
--------
Subsidiary for purposes of the Federal Insurance Contributions Act and any
consultant retained to provide services (other than in the capacity of a
director) to the Company or a Subsidiary.
1.9 "Option" means an option to purchase Shares of the Company granted
------
pursuant to and in accordance with the provisions of the Plan.
1.10 "Optionee" means a Director who is granted an Option pursuant to and
--------
in accordance with the provisions of the Plan.
1.11 "Option Shares" means Shares subject to and issued pursuant to an
-------------
exercise of an Option granted under the Plan.
1.12 "Share" means a share of Common Stock of the Company and/or any share
-----
or shares of stock of another corporation or corporations issued in exchange for
a share of Common Stock of the Company as a result of a merger, consolidation or
other adjustment to the capital structure of the Company.
1.13 "Subsidiary" means any corporation (other than the Company) in an
----------
unbroken chain of corporations beginning with the Company if at the time of the
granting of the Option, each of the corporations other than the last corporation
in the unbroken chain owns stock possessing 50% or more of the total combined
voting power of all classes of stock in one of the other corporations in the
chain.
-1-
<PAGE>
SECTION 2 ADMINISTRATION
2.1 Delegation to Committee. The Plan shall be administered by the
-----------------------
Committee. The members of the Committee shall be appointed by the Board of
Directors. The Committee shall consist of at least one or more members of the
Board of Directors who have not received a grant of an Option under the Plan
which remains outstanding and who are not currently eligible to receive a grant
of an Option under the Plan. The Board of Directors may from time to time
remove members from or add members to the Committee. Vacancies on the Committee
shall be filled by the Board of Directors.
2.2 Committee Actions. The Committee shall select one of its members as
-----------------
chairman, and shall hold meetings at such times and places as it may determine.
Acts approved by the majority of the Committee in a meeting at which a quorum is
present or acts reduced to or approved in writing by a majority of the members
of the Committee shall be the valid acts of the Committee. A quorum shall be
present at any meeting of the Committee which a majority of the Committee
members attend.
2.3 Finality. The Committee shall have the authority in its sole
--------
discretion to interpret the Plan, to grant Options under and in accordance with
the provisions of the Plan, and to make all other determinations and to take all
other actions it deems necessary or advisable for the implementation and
administration of the Plan or Agreements thereunder, except to the extent such
powers are herein reserved by the Board of Directors. All actions of the Board
of Directors and the Committee shall be final, conclusive, and binding upon the
Optionees. No member of the Board of Directors or the Committee shall be liable
for any action taken or decision made in good faith relating to the Plan or any
grant of an Option thereunder.
SECTION 3 ELIGIBILITY
Directors who are not Employees shall be eligible to receive Options under
the Plan on the terms and subject to the restrictions hereinafter set forth.
SECTION 4 SHARES SUBJECT TO PLAN
4.1 The aggregate number of Option Shares which may be issued under the
Plan shall at no time exceed 120,000. The limitations established by this
Section shall be subject to adjustment in accordance with the provisions of the
Plan.
4.2 In the event that an Option expires or is terminated for any reason,
the Option Shares allocable to the unexercised portion of such Option may again
be subjected to an Option under the Plan.
4.3 In the event that an Optionee delivers Shares as payment of the
exercise price for an Option, such Shares may be subjected to Options under this
Plan.
-2-
<PAGE>
SECTION 5 FORMULA AND TERMS AND CONDITIONS
5.1 (a) S. Norman Wareham and Steve L. Komar will each be granted an
option to purchase 12,000 shares on May 20, 1997, the date the Plan is
adopted.
(b) Each person who is not an Employee, does not perform services for
the Company or a Subsidiary other than in a capacity as a Director,
and first becomes a Director on May 20, 1997, the date the Plan is
adopted or, thereafter, will be granted an option to purchase 12,000
Shares on the date the person first becomes a Director.
5.2 Each Option granted will be exercisable as provided in the terms of
the Agreement to the extent vested. Each Option will vest over the Director's
period of continued service as a member of the Board of Directors according to
the following schedule:
<TABLE>
<CAPTION>
Years of Service
as a Director after
the Date of Grant Number of Shares Vested
----------------- -----------------------
<S> <C>
0 8,000
1 2,000
2 2,000
</TABLE>
5.3 The exercise price of each share granted pursuant to an Option shall
be the Fair Market Value of a Share on the day the Option is granted. "Fair
Market Value" with regard to a date means:
(1) the average of the high and low prices at which Shares shall
have been sold on that date or the last trading date prior to that
date as reported by the Nasdaq Stock Market (or, if applicable, as
reported by a national securities exchange selected by the Committee
on which the shares of Stock are then actively traded) and published
in The Wall Street Journal,
-----------------------
(2) if Shares are not traded on a securities exchange, but are
reported by the Nasdaq Stock Market and market information is
published on a regular basis in The Wall Street Journal, the average
-----------------------
of the published high and low sales prices for that date or the last
business day prior to that date as published in The Wall Street
---------------
Journal,
-------
(3) if such market information is not published on a regular
basis, the average of the high bid and low asked prices of Shares in
the over-the-counter market on that date or the last business day
prior to that date, as reported by the Nasdaq Stock Market, or, if not
so reported, by a generally accepted reporting service, or
(4) if Shares are not publicly traded, as determined in good
faith by the Committee with due consideration being given to (i) the
most recent independent appraisal of the Company, if such appraisal is
not more than twelve months old and (ii) the valuation methodology
used in any such appraisal provided that, for purposes
-3-
<PAGE>
of granting awards other than incentive stock options, Fair Market
Value of the Shares may be determined by the Committee by reference to
the average market value determined over a period certain or as of
specified dates, to a tender offer price for the Shares (if settlement
of an award is triggered by such an event) or to any other reasonable
measure of fair market value.
5.4 Each Option granted pursuant to this Plan shall be authorized by the
Committee, shall be evidenced by an Agreement and shall be subject to such
additional terms as set forth in the Agreement.
SECTION 6 TERM OF PLAN
The Plan shall be effective on the date hereof and shall continue to be
effective until ten (10) years following the earlier of the effective date of
the Plan or the date the stockholders approve the Plan, unless sooner terminated
by the Board of Directors pursuant to Section 8 hereof. The Company shall
submit the Plan to its stockholders for approval within twelve (12) months of
the adoption of the Plan by the Board of Directors.
SECTION 7 INDEMNIFICATION OF COMMITTEE
In addition to such other rights of indemnification that the members of the
Committee may have, each member of the Committee shall be indemnified by the
Company against the reasonable expenses, including attorneys' fees, actually and
necessarily incurred in connection with the defense of any action, suit or
proceeding, or in connection with any appeal therein, to which it may be a party
by reason of any action taken or failure to act under or in connection with the
Plan or any Option granted thereunder, and against all amounts paid by it in
settlement thereof (provided the settlement has received the prior approval of
the Company) or paid by it in satisfaction of a judgment in any such action,
suit or proceeding, except in relation to matters as to which it shall be
adjudged in the action, suit or proceeding that the Committee member is liable
for negligence or misconduct in the performance of its duties; provided that
promptly after institution of the action, suit or proceeding the Committee
member shall in writing offer the Company the opportunity, at its own expense,
to handle and defend such matter. Upon the delivery to the Committee member of
written notice of assumption by the Company of the defense of such matter, the
Company will not be responsible to the Committee member for any further fees and
disbursements relating to the defense of such matter, including fees and
disbursements of counsel.
SECTION 8 AMENDMENT AND TERMINATION OF THE PLAN
The Board of Directors at any time may amend or terminate the Plan without
shareholder approval; provided, however, that the Board of Directors may
condition any amendment on the approval of the shareholders of the Company if
such approval is necessary or advisable with respect to tax, securities or other
applicable laws to which the Company, this Plan, optionees or eligible employees
or directors are subject. No amendment or termination of the Plan shall
adversely affect the rights of an optionee with regard to his Options without
his consent.
-4-
<PAGE>
SECTION 9 NO OBLIGATION TO EXERCISE OPTION
The granting of an Option shall impose no obligation upon the Optionee to
exercise the Option.
SECTION 10 ADJUSTMENT IN OPTION SHARES AND EXERCISE PRICE
10.1 The number of Shares reserved for the grant of Options, the number of
Shares reserved for issuance upon the exercise or payment, as applicable, of
each outstanding Option, and the exercise price of each outstanding Option must
be proportionately adjusted for any increase or decrease in the number of issued
Shares resulting from a subdivision or combination of Shares or the payment of a
stock dividend in Shares to holders of outstanding Shares or any other increase
or decrease in the number of Shares outstanding effected without receipt of
consideration by the Company.
10.2 In the event of a merger, consolidation or other reorganization of the
Company or tender offer for Shares, the Committee may make such adjustments with
respect to awards and take such other action as it deems necessary or
appropriate to reflect such merger, consolidation, reorganization or tender
offer, including, without limitation, the substitution of new awards, or the
adjustment of outstanding awards, the acceleration of awards, the removal of
restrictions on outstanding awards, or the termination of outstanding awards in
exchange for the cash value determined in good faith by the Committee of the
vested portion of the award. Any fractional Shares resulting from such
adjustments shall be eliminated. All adjustments made by the Committee under
this Section shall be conclusive.
10.3 The existence of the Plan and the Options granted pursuant to the
Plan must not affect in any way the right or power of the Company to make or
authorize any adjustment, reclassification, reorganization or other change in
its capital or business structure, any merger or consolidation of the Company,
any issue of debt or equity securities having preferences or priorities as to
the Stock or the rights thereof, the dissolution or liquidation of the Company,
any sale or transfer of all or any part of its business or assets, or any other
corporate act or proceeding.
SECTION 11 WITHHOLDING TAXES
Whenever the Company proposes or is required to issue Shares to an optionee
who is or was an employee of the Company or a Subsidiary, or to his legatee or
legal representative under this Plan, pursuant to the exercise of an Option
granted under this Plan, the Company shall have the right to require the
recipient to remit to the Company an amount sufficient to satisfy any federal,
state and local withholding tax requirement, if any, prior to the delivery of
any certificate or certificates for such Shares. An optionee must pay the
withholding tax in cash or by certified check or by the Company deducting a
sufficient number of Shares from the Option Shares issued to satisfy withholding
taxes, in accordance with the Agreement.
-5-
<PAGE>
SECTION 12 RIGHTS AS A STOCKHOLDER
An Optionee or a transferee of an Optionee shall have no rights as a
stockholder with respect to any Option or Option Shares until the date of the
issuance of a stock certificate to him for the Option Shares. No adjustment
shall be made for dividends (ordinary or extraordinary, whether in cash,
securities or other property) or distributions or other rights for which the
record date is prior to the date the stock certificate is issued, except as
otherwise provided in the Plan.
SECTION 13 GOVERNING LAW
The laws of the State of Maryland shall govern this Plan.
IN WITNESS WHEREOF, the Company has caused the Plan to be executed as
of the day and year first above written.
ZMAX CORPORATION
By: /s/Michael C. Higgins
---------------------------
Michael C. Higgins
President
-6-
<PAGE>
Exhibit 10.4
ZMAX CORPORATION
DIRECTORS FORMULA STOCK OPTION AWARD
THIS AWARD is made as of the Grant Date, by ZMAX CORPORATION (the
"Company") to G. W. NORMAN WAREHAM (the "Optionee").
Upon and subject to the Terms and Conditions attached hereto and
incorporated herein by reference, the Company hereby awards as of the Grant Date
to Optionee a non-qualified stock option (the "Option"), as described below, to
purchase the Option Shares.
A. Grant Date: May 20, 1997.
----------
B. Type of Option: Non-Qualified Stock Option.
--------------
C. Plan (under which Option is granted): ZMAX Corporation 1997 Directors
------------------------------------
Formula Stock Option Plan.
D. Option Shares: All or any part of 12,000 shares of the Company's
-------------
common stock (the "Common Stock").
E. Exercise Price: $14.06 per share.
--------------
F. Exercise Period: Subject to such shorter period as provided in the
---------------
attached Terms and Conditions, the Option may be exercised during the
Exercise Period which commences on the Grant Date and ends no later
than at the close of business on the tenth (10th) anniversary of the
Grant Date, provided that the Option may be exercised as to no more
than the vested Option Shares, determined pursuant to the Vesting
Schedule. Note that other restrictions to exercising the Option, as
described in the attached Terms and Conditions, may apply.
G. Vesting Schedule: See Schedule A (attached)
---------------- ----------
IN WITNESS WHEREOF, the Company has executed and sealed this Award as of
the Grant Date set forth above.
ZMAX CORPORATION
By:
---------------------------
Michael C. Higgins
President
Page 1 of 6
<PAGE>
TERMS AND CONDITIONS
TO THE
ZMAX CORPORATION
DIRECTORS FORMULA STOCK OPTION AWARD
1. Exercise of Option. Subject to the provisions provided herein or in
------------------
the Award made pursuant to the ZMAX Corporation 1997 Directors Formula Stock
Option Plan.
(a) The Option may be exercised with respect to all or any portion of
the vested Option Shares at any time during the Exercise Period by the
delivery to the Company, at its principal place of business, of (i) a
written notice of exercise in substantially the form attached hereto as
Exhibit 1, which shall be actually delivered to the Company no earlier than
---------
thirty (30) days and no later than ten (10) days prior to the date upon
which Optionee desires to exercise all or any portion of the Option and
(ii) payment to the Company of the Exercise Price multiplied by the number
-------------
of shares being purchased (the "Purchase Price") in the manner provided in
Subsection (b), and (iii) payment, in accordance with Section 3, of the
withholding liability arising from the exercise if the Optionee becomes an
employee of the Company. Upon acceptance of such notice and receipt of
payment in full of the Purchase Price and withholding liability, the
Company shall cause to be issued a certificate representing the Option
Shares purchased.
(b) The Purchase Price shall be paid in full upon the exercise of an
Option and no Option Shares shall be issued or delivered until full payment
therefor has been made. Payment of the Purchase Price for all Option
Shares purchased pursuant to the exercise of an Option shall be made in
cash or, alternatively, as follows:
(i) by delivery to the Company of a number of shares of Common
Stock which have been owned by the Optionee for at least six months
prior to the date of the Option's exercise, having a Fair Market
Value, as determined under the Plan, on the date of exercise either
equal to the Purchase Price or in combination with cash to equal the
Purchase Price; or
(ii) by receipt of the Purchase Price in cash from a broker,
dealer or other "creditor" as defined by Regulation T issued by the
Board of Governors of the Federal Reserve System following delivery by
the Optionee to the Committee (defined in the Plan) of instructions in
a form acceptable to the Committee regarding delivery to such broker,
dealer or other creditor of that number of Option Shares with respect
to which the Option is exercised.
2. Exercise Price. The exercise price for each Option Share shall be
--------------
$14.06, subject to adjustment as set forth in Section 7 below (the "Exercise
Price").
Page 2 of 6
<PAGE>
3. Withholding. If the Optionee becomes an employee of the Company, the
-----------
Optionee must satisfy his federal, state and local, if any, withholding taxes
imposed by reason of the exercise of the Option either by paying to the Company
the full amount of the withholding obligation (i) in cash, (ii) by electing,
irrevocably and in writing in substantially the form attached hereto as Exhibit
-------
2 (a "Withholding Election"), to have the actual number of shares of Common
- -
Stock issuable upon exercise reduced by the smallest number of whole shares of
Common Stock which, when multiplied by the fair market value of the Common Stock
as of the date the Option is exercised, is sufficient to satisfy the amount of
withholding tax; or (iii) by any combination of the above. Optionee may make a
Withholding Election only if the following conditions are met:
(a) the Withholding Election is made by executing and delivering to
the Company a properly completed Notice of Withholding Election in
substantially the form of Exhibit 2 attached hereto;
(b) the Withholding Election is delivered to the Company sufficiently
in advance of the date on which the amount of tax required to be withheld
is determined (the "Tax Date") as the Committee under the Plan (the
"Committee") determines is necessary or appropriate to satisfy the
conditions of the exemptions provided under Rule 16b-3 promulgated under
the Securities Exchange Act of 1934 (the "1934 Act");
(c) any Withholding Election is irrevocably given in a manner that
satisfies the requirements of the exemption provided under Rule 16b-3
promulgated under the 1934 Act; and
(d) if the Optionee is considered by the Committee not to be subject
to Section 16 of the 1934 Act, the Withholding Election is made no later
than the Tax Date.
Notwithstanding anything to the contrary herein, the Committee may in its
sole discretion disapprove and give no effect to any Withholding Election.
4. Term and Termination of Option. The Option shall terminate on the
------------------------------
earliest of (i) the last day of the Exercise Period, (ii) as of the date which
is fifteen (15) days after cessation of service if the Optionee ceases, during
the first year after the Grant Date, to serve as either a director, employee, or
consultant of the Company or a Subsidiary (as defined in the Plan) for any
reason, except if the cessation of service is due to death or Disability for
"Cause" as defined below, (iii) as of the date which is one year after cessation
of service if the Optionee ceases upon or after the first anniversary of the
Grant Date, to serve as either a director, employee, or consultant of the
Company or a Subsidiary, except if such cessation of service is due to death or
Disability or for Cause, (iv) as of the date which is one year after the
Optionee's death or Disability (as defined in the Plan), (v) as of the time the
Optionee ceases to serve as either a director, employee, or consultant of the
Company or a Subsidiary for Cause, or (vi) as of the time the Optionee breaches
the provisions of any confidentiality, noncompetition, or nonsolicitation
agreement with the Company or a Subsidiary, whether pursuant to an employment or
consulting agreement or otherwise. Upon the termination of the Option, this
Option and all unexercised rights granted to Optionee hereunder shall terminate,
and thereafter be null and void.
Page 3 of 6
<PAGE>
"Cause" means
(a) willful and continued failure (other than failure resulting from
incapacity during illness) to substantially perform duties with the
Company or a Subsidiary,
(b) any act of fraud, misappropriation, dishonesty, embezzlement or
similar conduct against the Company or a Subsidiary, as determined by
the Committee,
(c) conviction for a felony or any other crime involving moral turpitude,
or
(d) "Cause" or words of similar impart as defined or determined pursuant
to any employment or consulting agreement between the Optionee and the
Company or a Subsidiary.
5. Rights as Shareholder. Until the stock certificates reflecting the
---------------------
Option Shares accruing to the Optionee upon exercise of the Option are issued to
the Optionee, the Optionee shall have no rights as a shareholder with respect to
such Option Shares. The Company shall make no adjustment for any dividends or
distributions or other rights on or with respect to Option Shares for which the
record date is prior to the issuance of that stock certificate, except as the
Plan or this Award otherwise provides.
6. Restriction on Transfer of Option. The Option evidenced hereby is
---------------------------------
nontransferable other than by will or the laws of descent and distribution, and,
shall be exercisable during the lifetime of the Optionee only by the Optionee
(or in the event of his disability, by his legal representative) and after his
death, only by legal representative of the Optionee's estate.
7. Changes in Capitalization; Merger; Reorganization.
-------------------------------------------------
(a) The number of Option Shares and the Exercise Price shall be
proportionately adjusted for any increase or decrease in the number of
issued shares of Common Stock resulting from a subdivision or combination
of shares or the payment of a stock dividend in shares of Common Stock to
holders of outstanding shares of Common Stock or any other increase or
decrease in the number of shares of Common Stock outstanding effected
without receipt of consideration by the Company.
(b) In the event of a merger, consolidation or other reorganization
involving the Company or a tender offer for shares of Common Stock, the
Committee may, in its sole discretion, adjust the number and class of
securities subject to the Option, with a corresponding adjustment made in
the Exercise Price; substitute a new option to replace the Option; or
accelerate the termination of the Option Period to a date prior to the
occurrence of any event specified in Section 4 above; or, terminate the
Option in consideration of payment to Optionee of the excess of the then
Fair Market Value (as defined in the Plan) of the vested Option Shares over
the Exercise Price of the vested Option Shares.
(c) The existence of the Plan and this Award shall not affect in any
way the right or power of the Company to make or authorize any adjustment,
reclassification,
Page 4 of 6
<PAGE>
reorganization or other change in its capital or business structure, any
merger or consolidation of the Company, any issue of debt or equity
securities having preferences or priorities as to the Common Stock or the
rights thereof, the dissolution or liquidation of the Company, any sale or
transfer of all or any part of its business or assets, or any other
corporate act or proceeding.
8. Special Limitations on Exercise. Any exercise of the Option is
-------------------------------
subject to the condition that if at any time the Committee, in its discretion,
shall determine that the listing, registration or qualification of the shares
covered by the Option upon any securities exchange or under any state or federal
law is necessary or desirable as a condition of or in connection with the
delivery of shares thereunder, the delivery of any or all shares pursuant to the
Option may be withheld unless and until such listing, registration or
qualification shall have been effected. The Optionee shall deliver to the
Company, prior to the exercise of the Option, such information, representations
and warranties as the Company may reasonably request in order for the Company to
be able to satisfy itself that the Option Shares being acquired in accordance
with the terms of an applicable exemption from the securities registration
requirements of applicable federal and state securities laws.
9. Shareholders Agreement. As a condition to the exercise of this
----------------------
Option, the Optionee may be required to enter into a shareholders agreement if
there is one in place in which other shareholders of the Company are a party to
at the time the Optionee wishes to exercise the Option.
10. Legend on Stock Certificates. Certificates evidencing the Option
----------------------------
Shares, to the extent appropriate at the time, shall have noted conspicuously on
the certificates a legend intended to give all persons full notice of the
existence of the conditions, restrictions, rights and obligations set forth in
this Award and in the Plan.
11. Governing Laws. This Award shall be construed, administered and
--------------
enforced according to the laws of the State of Maryland; provided, however, no
option may be exercised except, in the reasonable judgment of the Board of
Directors, in compliance with exemptions under applicable state securities laws
of the state in which the Optionee resides, and/or any other applicable
securities laws.
12. Successors. This Award shall be binding upon and inure to the benefit
----------
of the heirs, legal representatives, successors and permitted assigns of the
parties.
13. Notice. Except as otherwise specified herein, all notices and other
------
communications under this Award shall be in writing and shall be deemed to have
been given if personally delivered or if sent by registered or certified United
States mail, return receipt requested, postage prepaid, addressed to the
proposed recipient at the last known address of the recipient. Any party may
designate any other address to which notices shall be sent by giving notice of
the address to the other parties in the same manner as provided herein.
14. Severability. In the event that any one or more of the provisions or
------------
portion thereof contained in this Award shall for any reason be held to be
invalid, illegal or unenforceable in any respect, the same shall not invalidate
or otherwise affect any other provisions of this Award, and this
Page 5 of 6
<PAGE>
Award shall be construed as if the invalid, illegal or unenforceable provision
or portion thereof had never been contained herein.
15. Entire Agreement. Subject to the terms and conditions of the Plan,
----------------
this Award expresses the entire understanding and agreement of the parties.
This Award may be executed in two or more counterparts, each of which shall be
deemed an original but all of which shall constitute one and the same
instrument.
16. Violation. Any transfer, pledge, sale, assignment, or hypothecation
---------
of the Option or any portion thereof shall be a violation of the terms of this
Award and shall be void and without effect.
17. Headings. Paragraph headings used herein are for convenience of
--------
reference only and shall not be considered in construing this Award.
18. Specific Performance. In the event of any actual or threatened
--------------------
default in, or breach of, any of the terms, conditions and provisions of this
Award, the party or parties who are thereby aggrieved shall have the right to
specific performance and injunction in addition to any and all other rights and
remedies at law or in equity, and all such rights and remedies shall be
cumulative.
19. No Right to Continued Employment or Service. Neither the
-------------------------------------------
establishment of the Plan nor the award of Option Shares hereunder shall be
construed as giving the Optionee the right to continued employment or
service.
Page 6 of 6
<PAGE>
SCHEDULE A
VESTING SCHEDULE
<TABLE>
<CAPTION>
Years of Service
as a Director
After Date of Grant Vested Option Shares
------------------- --------------------
<S> <C>
0 8,000
1 2,000
2 2,000
</TABLE>
For purposes of the Vesting Schedule, an Optionee shall be granted a "Year
of Service" for each full consecutive year of continuous service as a director,
employee, or consultant with the Company or an Affiliate beginning on the Date
of Grant and during which the Optionee remains, at all times, a director,
employee, or consultant of the Company or an Affiliate.
<PAGE>
EXHIBIT 1
NOTICE OF EXERCISE OF
STOCK OPTION TO PURCHASE
COMMON STOCK OF
ZMAX CORPORATION
Name ____________________________
Address__________________________
_________________________________
Date_____________________________
ZMAX Corporation
2051 Century Boulevard
Germantown, Maryland 20874
Attn: Chief Financial Officer
Re: Exercise of Non-Qualified Stock Option
Gentlemen:
Subject to acceptance hereof in writing by ZMAX Corporation (the "Company")
pursuant to the provisions of the ZMAX Corporation 1997 Directors Formula Stock
Option Plan (the "Plan"), I hereby give at least ten days but not more than
thirty days prior notice of my election to exercise options granted to me to
purchase ______________ shares of common stock of the Company under the 1997
Nonqualified Formula Stock Option Award granted on _______________, 199__ (the
"Award"). The purchase shall take place as of __________, ____ (the "Exercise
Date").
On or before the Exercise Date, I will pay the applicable purchase price as
follows:
[_] by delivery of a certified check for $____________ for the full
purchase price payable to the order of ZMAX Corporation.
[_] by delivery of a certified check for $________ representing a portion
of the purchase price to the order of ________________ with the
balance to consist of shares of common stock that I have owned for at
least six months and that are represented by a stock certificate I
will surrender to the Company with my endorsement. If the number of
shares of common stock represented by such stock certificate exceeds
the number to be applied against the purchase price, I understand that
a new stock certificate will be issued to me reflecting the excess
number of shares.
[_] by delivery of a stock certificate representing shares of common stock
of the Company that I have owned for at least six months which I will
surrender to the Company with my endorsement as payment of the
purchase price. If the number of shares of common stock of the
Company represented by such certificate exceeds the
EXHIBIT A to Directors Formula Stock Option Award
Page 1 of 3
<PAGE>
number to be applied against the purchase price, I understand that a
new certificate will be issued to me reflecting the excess number of
shares.
The required federal, state and local income tax withholding, if any, on
the exercise of the option shall be paid in cash on or before the Exercise Date.
Covenants and Representations of Optionee. Optionee represents, warrants,
-----------------------------------------
covenants, and agrees with the Company as follows as of the date of exercising
the Option:
The Option is being received for Optionee's own account without the
participation of any other person, with the intent of holding the Option and the
Option Shares issuable pursuant thereto for investment and without the intent of
participating, directly or indirectly, in a distribution of the Option Shares
and not with a view to, or for resale in connection with, any distribution of
the Option Shares or any portion thereof;
Optionee is not acquiring the Option based upon any representation,
oral or written, by any person with respect to the future value of, or income
from, the Option Shares subject to this Option, but rather upon an independent
examination and judgment as to the prospects of the Company;
Optionee has received a copy of the Plan, is familiar with the
business and affairs of the Company, and realizes that the receipt of the Option
Shares is a speculative investment and that any possible profit therefrom is
uncertain;
Optionee has had the opportunity to ask questions of and receive
answers from the Company and any person acting on its behalf and to obtain all
information available with respect to the Plan, the Company and its affairs, and
has received all information and data with respect to the Plan and the Company
that he has requested and which he has deemed relevant in connection with his
receipt of the Option and the Option Shares subject thereto;
Optionee is able to bear the economic risk of the investment,
including the risk of a complete loss of his investment, and Optionee
acknowledges that he must continue to bear the economic risk of the investment
in the Option Shares received upon Option exercise for an indefinite period;
Optionee understands and agrees that the Option Shares subject to the
Option may be issued and sold to Optionee without registration under any state
or federal law relating to the registration of securities for sale, and in that
event will be issued and sold in reliance on exemptions from registration under
appropriate state and federal laws;
The Option Shares issued to Optionee upon exercise of the Option will
not, subject to any other applicable restrictions set forth in the Plan or the
Award, be offered for sale, sold or transferred by Optionee other than pursuant
to:
(1) an effective registration under applicable state securities laws
or in a transaction which is otherwise in compliance with those laws;
EXHIBIT A to Directors Formula Stock Option Award
Page 2 of 3
<PAGE>
(2) an effective registration under the Securities Act of 1933 (the
"1933 Act"), or a transaction otherwise in compliance with the 1933 Act; and
(3) evidence satisfactory to the Company of compliance with the
applicable securities laws.
The Company shall be entitled to rely upon an opinion of counsel satisfactory to
it with respect to compliance with the foregoing laws.
The Company will be under no obligation to register the Option Shares
issuable pursuant to the Option or to comply with any exemption available for
sale of the Option Shares by the Optionee without registration, and the Company
is under no obligation to act in any manner so as to make Rule 144 promulgated
under the 1933 Act available with respect to sale of the Option Shares by the
Optionee;
A legend indicating that the Option Shares issued pursuant to the
Option has not been registered under the applicable securities laws and
referring to any applicable restrictions on transferability and sale of the
Option Shares may be placed on the certificate or certificates delivered to
Optionee and any transfer agent of the Company may be instructed to require
compliance therewith;
As soon as the stock certificate is registered in my name, please deliver
it to me at the above address.
Very truly yours,
-----------------------------------
Legal Signature
AGREED TO AND ACCEPTED:
ZMAX CORPORATION
By:
----------------------
Title:
-------------------
Number of Shares Exercised:
---------
Number of Shares Remaining: Date:
--------- ---------------------
EXHIBIT A to Directors Formula Stock Option Award
Page 3 of 3
<PAGE>
EXHIBIT 2
NOTICE OF WITHHOLDING ELECTION
This Withholding Election is Required Only if
the Optionee became an Employee of the Company
Name __________________________
Address________________________
_______________________________
Date___________________________
Social Security No.____________
ZMAX Corporation
2051 Century Boulevard
Germantown, Maryland 20874
Attn: Chief Financial Officer
This election relates to the Option defined in Paragraph 3 below. I hereby
certify that:
(1) My correct name and social security number and my current address are
set forth at the end of this document.
(2) I am (check one, whichever is applicable).
[_] the original recipient of the Option.
[_] the legal representative of the estate of the original recipient
of the Option.
[_] a legatee of the original recipient of the Option.
[_] the legal guardian of the original recipient of the Option.
(3) The Option pursuant to which this election is made is dated
_________________ and was issued under the ZMAX Corporation 1997
Directors Formula Stock Option Award dated the ____ day of _________,
199__ (the "Award") in the name of ________________ for 6,000 Shares .
This election relates to _______________ Shares issuable upon whole or
partial exercise(s) of the Option (the "Option Shares"); provided that
the numbers set forth above shall be deemed changed as appropriate to
reflect stock splits and other adjustments contemplated by the
applicable Award provisions.
(4) In connection with any future exercise of the Option with respect to
the Option Shares, I hereby elect to have certain of the Option Shares
issuable pursuant to the
EXHIBIT B to Directors Formula Stock Option Award
Page 1 of 2
<PAGE>
exercise withheld by the Company for the purpose of having the value
of the Option Shares applied to pay federal, state, and local, if any,
taxes arising from the exercise. The Option Shares to be withheld
shall have, as of the Tax Date applicable to the exercise, a Fair
Market Value equal to the minimum statutory tax withholding
requirement under federal, state, and local law in connection with the
exercise.
(5) This Withholding Election is made prior to the Tax Date and is
otherwise made pursuant to Section 2 of the Award.
(6) I understand that this Withholding Election may not be revised,
amended or revoked by me but is subject to the disapproval of the
Committee.
(7) I further understand that, if this Withholding Election is not
disapproved by the Committee, the Company shall withhold from the
Option Shares a number of Option Shares having the value specified in
Paragraph 4 above.
(8) The Award has been made available to me by the Company, I have read
and understand the Awards and I have no reason to believe that any of
the conditions therein to the making of this Withholding Election have
not been met. Capitalized terms used in this Notice of Withholding
Election without definition shall have the meanings given to them in
the Award.
Very truly yours,
---------------------------------
Legal Signature
AGREED TO AND ACCEPTED:
ZMAX CORPORATION
By:
----------------------------
Title:
--------------------------
Number of Shares Exercised:
----------------------
Number of Shares Remaining: Date:
---------------------- ------------
EXHIBIT B to Directors Formula Stock Option Award
Page 2 of 2
<PAGE>
Exhibit 10.5
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made on November 6, 1996,
between CENTURY SERVICES, INC., a Maryland corporation (the "Company"), and
Michael C. Higgins, an individual resident of the State of Maryland (the
"Executive").
BACKGROUND:
The Executive desires to enter into employment with the Company and the
Company desires to employ the Executive.
The Executive is a stockholder in ZMAX Corporation, a Nevada corporation
("ZMAX"), the parent company of the Company.
In consideration of the employment of the Executive by the Company and the
mutual agreements stated below, the parties agree as follows:
STATEMENT OF TERMS:
SECTION 1
DUTIES OF EXECUTIVE
1.1 Engagement. The Company employs the Executive, and the Executive
----------
accepts such employment with the Company, subject to the terms and conditions of
this Agreement.
1.2 Duties and Responsibilities of Executive. The Executive will be
----------------------------------------
employed as the President of the Company and will do and perform all services
and acts necessary or advisable to fulfill the duties of President of the
Company and will conduct and perform such services and activities as may be
determined from time to time by the chief executive officer of the Company.
During the term of this Agreement, the Executive agrees to devote full time,
energy and skill to the business of the Company and to the promotion of the
Company's interests. The Executive will diligently follow and implement all
management policies and decisions of the Company. The Executive agrees that he
has a duty of loyalty to the Company and will not engage in, or otherwise be
interested in, directly or indirectly, any other business or activity that would
materially and adversely affect the Company's business or the Executive's
ability to perform his duties under this Agreement.
1.3 Working Facilities. The Company, at its expense, will furnish the
------------------
Executive with such office space, office equipment, secretarial help and such
other facilities, equipment and services as the Company determines to be needed
or beneficial for the performance by the Executive of the duties contemplated
under this Agreement. It is anticipated that the Executive will provide
services at and have available for use the Company's facilities at its
headquarters location.
<PAGE>
SECTION 2
COMPENSATION
2.1 Cash Compensation. For all services to be rendered by the
-----------------
Executive under this Agreement, Company will pay the Executive the following
amounts, which payment will be subject to subject withholdings for local, state
and federal taxes, social security, and other deductions required by law or the
policies of the Company, from time to time in effect:
(a) Interim Base Salary. The Company will pay the Executive an annual
-------------------
gross salary (the "Base Salary") equal to the sum of (i) $8,000 per month
plus (ii) 20% of the Cash Flow (as defined below) generated by the
Company's operations up to a maximum of $10,000 in any one month. The Base
Salary will be payable on the Company's standard salary payment schedule
for executive level employees. For purposes of this provision the term
"Cash Flow" means, with respect to each calendar month, all operating
revenues from sales and services and licensing and franchising income (but
excluding proceeds from loans or capital infusions and proceeds from sales,
exchanges and other dispositions of property or rights not in the ordinary
course of business) LESS direct operating expenses including software
licensing fees and a provision for the Company's income taxes calculated
based on the then-applicable statutory rates (but excluding capital
expenses, depreciation, amortization, debt service, dividends and
intercompany charges other than charges that would be direct operating
expenses if paid by the Company). Cash Flow will be determined by Arthur
Andersen (or such other independent accounting firm then serving the
Company) for the relevant period on a cash basis.
(b) Adjusted Base Salary and Bonus. As soon as practicable after the
------------------------------
date of this Agreement and in no event later than 60 days after the date of
this Agreement, the Board of Directors of ZMAX will set the Base Salary and
bonuses of the Executive, which will include a Base Salary and performance
bonuses and will be evidenced by an addendum to this Agreement executed by
the Executive and the Company from time to time; provided, however, that
the annual Base Salary will not be less than $100,000.
In no event will the Executive be entitled to any form of incentive or stock or
performance bonus compensation other than that described in this Agreement or
any addendum to this Agreement.
2.2 Business Expenses. The Executive will be entitled to be reimbursed
-----------------
for all reasonable and necessary expenses incurred by him in connection with the
performance of his duties of employment under this Agreement in accordance with
the policies of the Company. The Executive will, as a condition of any such
reimbursement, submit verification of the nature and amount of such expenses in
accordance with the reimbursement policies from time to time adopted by the
Company.
2.3 Fringe Benefits. The Executive will have the same rights as all other
---------------
employees to participate in all pension and other retirement plans, medical
insurance, life insurance and other fringe benefit programs, as are now or may
hereafter be established by the Company;
-2-
<PAGE>
provided, however, that such fringe benefits will not be less that those
provided by the Company on the date of this Agreement. The Executive will
receive 4 weeks paid vacation per year in accordance with the Company's policy
in effect from time to time.
SECTION 3
TERM AND TERMINATION
3.1 Term. The term of the Executive's employment under this Agreement
----
commences on the date of this Agreement and continues for a period of 3 years,
unless sooner terminated as provided in this Section 3.
3.2 Termination. The Executive's employment under this Agreement may be
-----------
terminated only upon the occurrence of any of the following events:
(a) The death or permanent disability of the Executive. For purposes
of this Section 3.2(a), "permanent disability" means (1) the total
inability of the Executive to perform his duties under this Agreement for a
period of 60 consecutive days as certified by a physician chosen by the
Company and reasonably acceptable to the Executive, or (2) the Executive
becomes entitled to (A) disability retirement benefits under the federal
Social Security Act, or (B) recover benefits under any long term disability
plan or policy maintained by the Company.
(b) The Company's election to terminate the Executive for cause. For
purposes of this Section 3.2(b), appropriate cause will be deemed to result
for (i) any breach of the terms of this Agreement (other than the covenants
contained in Sections 4 and 5) by the Executive, which breach or conduct
remains uncured after the expiration of 10 days following the delivery of
written notice of such breach or conduct to the Executive by the Company;
(ii) any breach of the covenants contained in Sections 4 and 5 of this
Agreement; (iii) conduct by the Executive that amounts to fraud, dishonesty
or willful misconduct in the performance of his duties and responsibilities
under this Agreement; or (iv) the conviction of or a plea of guilty or nolo
----
contendere by the Executive of a felony.
----------
(c) The mutual agreement by the Executive and the Company to terminate
the Executive's employment under this Agreement.
(d) The Executive's election to terminate his employment under this
Agreement, provided that Executive will give the Company at least 60 days
prior written notice of his intent to terminate.
(e) The Company's election to terminate the Executive's employment
under this Agreement.
3.3 Effect of Termination. Upon the termination of the Executive's
---------------------
employment under this Agreement, the Company will have no further obligation to
the Executive or his personal representative with respect to this Agreement or
his employment by the Company,
-3-
<PAGE>
except for the payment of any compensation accrued up to the date of termination
of this Agreement and unpaid at the date of such termination and the payment of
any severance payments that may be due under Section 3.4 of this Agreement and
as set forth in Section 6.3 regarding its agreement to arbitrate certain
disputes under this Agreement.
3.4 Severance Payment. In addition to the amounts payable pursuant to
-----------------
Section 3.3, if this Agreement is terminated by the death or permanent
disability of Executive pursuant to Section 3.2(a) or by the Company without
cause pursuant to Section 3.2(e), the Company will pay to Executive or
Executive's estate all severance payments as set forth in any addendum to this
Agreement then in effect or, if such addendum does not designate severance
payments, severance payments at the annual rate of $100,000 for the then
remaining term of this Agreement as if this Agreement had not been terminated.
Neither the Executive nor the Executive's estate will be entitled to any bonus
or form of employee benefit plan, including, without limitation, life, health,
dental and disability insurance, or the payment of monies in lieu thereof. The
severance payments provided pursuant to this Section 3.4 will be paid at such
times and in such manner as stated in the addendum to this Agreement or if not
so stated as payments normally would be made under Section 2 and will be subject
to deductions and withholding as provided in Section 2. Notwithstanding
anything in this Agreement to the contrary, the Company will have no obligation
to continue any payments due the Executive, and the Executive will not have any
right to receive such payments, if the Company determines in good faith that the
Executive has breached the covenants in Sections 4 or 5 of this Agreement. In
addition, the Company's obligation to make such severance payments to the
Executive under this Agreement is conditioned upon the Executive's (or his
estate's) execution and delivery to the Company of a release (in form and
substance reasonably satisfactory to the Company) of any and all claims known to
the Executive (or his estate) that the Executive (or his estate) may have
against the Company or any officer, director or Affiliate of the Company (as
defined in Section 4.1(a)) at any time up to and including the date of
termination and arising thereafter, excluding the Company's obligation to make
the severance payments.
3.5 Survival. The obligations of the Executive pursuant to Sections 4, 5
--------
and 6 survive the termination of this Agreement.
SECTION 4
RESTRICTIONS
4.1 Certain Definitions.
-------------------
(a) "Affiliate of the Company" means any person or entity controlled
------------------------
by, controlling or under common control with the Company. For purposes of
this definition, the term "control" when used with respect to any person or
entity means the power to direct the management and policies of such person
or entity, directly or indirectly, whether as an officer or director,
through the ownership of voting securities, by contract or otherwise. The
term Affiliate of the Company specifically includes any subsidiary, parent
or franchisee of the Company or any company or enterprise in which the
Company owns more than 10% of the voting securities or similar indicia or
ownership.
-4-
<PAGE>
(b) "Business of the Company" means the business of resolution of the
-----------------------
Year 2000 date change problem in software programs and the development and
sale of products and services related thereto whether conducted by the
Company or any Affiliate of the Company.
(c) "Competitive Business" means any business of enterprise that
--------------------
competes with the Business of the Company.
4.2 Restrictions. The Executive agrees to comply with all of the
------------
restrictions set forth below at all times during the terms of this Agreement and
(i) for a period of two years after the termination of this Agreement by the
Company pursuant to Section 3.2(b) or by the Executive pursuant to Section
3.2(d) so long as the Company is not in breach of this Agreement or (ii) for the
period during which the Company is paying severance payments to the Executive
pursuant to Section 3.4.
(a) Agreement Not to Solicit Customers. The Executive will not
----------------------------------
(except with the prior written consent of the Company), either directly or
indirectly, on his own behalf or on behalf of others, solicit, divert or
appropriate or attempt to solicit, divert or appropriate to any Competitive
Business, any Business of the Company from any customer or actively sought
prospective customer of the Company or any Affiliate of the Company (i)
with whom the Company or any Affiliate of the Company has current
agreements relating to the Business of the Company or (ii) with whom active
negotiations are underway and (A) with whom the Executive has dealt in
regard to the Business of the Company or (B) with whom the Executive has
supervised negotiations or business relations or (C) about whom the
Executive has acquired Proprietary Information (as defined in Section
5.1(a)) regarding the needs of such customer or prospective customer for
the Business of the Company or negotiations or business relations with the
Company or any Affiliate of the Company, in the course of his employment.
(b) Agreement Not to Compete. The Executive will not (except with the
------------------------
prior written consent of the Company) engage in any Competitive Business,
either directly or indirectly, on his own behalf or on behalf of others, in
any capacity that involves duties and responsibilities substantially
similar to those undertaken by him for the Company.
(c) Agreement Not to Solicit Employees. The Executive will not,
----------------------------------
either directly or indirectly, on his own behalf or on behalf of others,
solicit, divert or hire away, or attempt to solicit, divert, or hire away,
any person employed by the Company or any Affiliate of the Company or any
independent contractor of the Company or any Affiliate of the Company that
is providing services relating to the Business of Company at any facility
where the Executive performed services and with whom he had regular contact
in the course of his employment by the Company. The restriction in this
Section 4.2(c) does not apply if the employee or independent contractor
independently initiated contact with the Executive with regard to his or
her employment or retention.
-5-
<PAGE>
4.3 Tolling. If the Executive breaches any of the covenants contained in
-------
Section 4 of this Agreement, the running of the period of the restrictions
described in the covenant breached will be tolled during the continuation of any
breach by the Executive and the running of the period of the restriction will
begin again only upon compliance by the Executive with the terms of the covenant
breached.
4.4 Non-Applicability of Restrictions. The Company agrees that the
---------------------------------
restrictions contained in this Section 4 do not apply after expiration of this
Agreement by its own terms.
SECTION 5
PROPRIETARY INFORMATION
5.1 Definitions.
-----------
(a) "Proprietary Information" means information related to the Company
-----------------------
or any Affiliate of the Company (1) that derives economic value, actual or
potential, from not being generally known to or readily ascertainable by
other persons who can obtain economic value from its disclosure or use; and
(2) that is the subject of efforts that are reasonable under the
circumstances to maintain its secrecy; and all tangible reproductions or
embodiments of such information. Assuming the criteria in (1) and (2)
above are satisfied, Proprietary Information includes technical and
nontechnical data related to technical and business information, including,
but not being limited to, trade secrets, computer hardware and software,
procedures manuals, methods, compositions, machines, computer programs,
research projects, processes, formulae, data, algorithms, source codes,
object codes, documentation, flow-charts, drawings, correspondence, know-
how, improvements, inventions, techniques, personnel records, pricing
information, sales or marketing plans and strategies, supply sources,
production or merchandising plans, and information concerning the Company's
and any Affiliate of the Company's clients, customers, accounts, employees,
contractors or affiliates. Proprietary Information does not include any
information that (i) is or becomes part of the public domain through no act
or omission attributable to the Executive, (ii) is released after prior
written authorization by the Company, or (iii) is required to be disclosed
by applicable law, regulation or court order; provided that if disclosure
is required by law, the Executive will provide the Company with prompt
notice of such requirement so that the Company may seek an appropriate
protective order.
(b) "Third Party Information" means Proprietary Information that has
-----------------------
been disclosed to the Company or an Affiliate of the Company by a third
party and that the Company or such Affiliate of the Company is obligated to
treat as confidential.
(c) "Proprietary Technology" means Proprietary Information relating
----------------------
specifically to the "BIC", "IREW" and "COCACT" software programs owned or
licensed by the Company and any related source codes, object codes,
documentation and manuals relating thereto and any enhancements or
modifications thereof and any other software, source codes, processes,
techniques, trade secrets or know how that may be developed, owned or
licensed by the Company or any Affiliate of the Company relating to the
-6-
<PAGE>
Business of the Company (as defined in Section 4.1) or other core line of
business in which the Company may become engaged.
5.2 Non-Disclosure. The Executive agrees that during the term of his
--------------
employment by the Company and for the applicable time periods thereafter as
specified below, he will receive all Proprietary Information in trust and that
he will not disclose or make available, directly or indirectly, any Proprietary
Information to any person, concern or entity, except in the proper performance
of his duties and responsibilities under this Agreement or with the prior
written consent of the Company. The Executive will abide by the Company's
policies and regulations, as established from time to time, for the protection
of its Proprietary Information for the time period specified in this Section
5.2. The Executive agrees that the nondisclosure prohibitions described in this
Section 5.2 survive the expiration or termination of this Agreement (i) with
respect to Proprietary Information other than Proprietary Technology for a
period of 2 years, except for Third Party Information as to which the Executive
shall maintain confidentiality so long as the Company or Affiliate of the
Company is required to main confidentiality and (ii) with respect to Proprietary
Technology for so long as the Proprietary Technology retains its status as such
and remains confidential.
5.3 Ownership of Proprietary Information. The Executive acknowledges and
------------------------------------
agrees that all Proprietary Information, and all physical embodiments thereof,
are confidential to and will be and remain the sole and exclusive property of
the Company. Upon request by the Company, and in any event upon termination of
his employment with the Company for any reason, the Executive will promptly
deliver to the Company all property belonging to the Company including, without
limitation, all Proprietary Information (and all embodiments thereof) then in
his custody, control or possession.
5.4 Assignment of Inventions, Etc. The Executive agrees that all
-----------------------------
inventions, discoveries, improvements, processes, techniques, computer programs
or improvements thereto (an "Invention") conceived or first practiced by the
Executive during his employment by the Company, and all patent rights and
copyrights thereto, if any, will become the property of the Company, and the
Executive hereby irrevocably assigns to the Company all of the Executive's
rights to all Inventions.
5.5 Works for Hire. The Executive agrees that any Works (as defined
--------------
below) created by the Executive in the course of the Executive's duties as an
employee of the Company are subject to the "Work for Hire" provisions contained
in Sections 101 and 201 of the United States Copyright Law, Title 17 of the
United States Code. "Work" means a copyrightable work of authorship, including
without limitation, any technical descriptions for products, user's guides,
illustrations, advertising materials, computer programs (including the contents
of read only memories) and any contribution to such materials. All right, title
and interest to copyrights in all Works which have been or will be prepared by
the Executive within the scope of his or her employment with the Company will be
the property of the Company. The Executive acknowledges and agrees that, to the
extent the provisions of Title 17 of the United States Code do not vest in the
Company the copyrights to any Works, the Executive hereby assigns to the Company
all right, title and interest to copyrights which the Executive may have in the
Works.
-7-
<PAGE>
The Executive must disclose to the Company all Works and will execute and
deliver all applications, registrations, and documents relating to the
copyrights to the Works and will provide assistance to secure the Company's
title to the copyrights in the Works. The Company will be responsible for all
expenses incurred in connection with the registration of all the copyrights.
5.6 Acknowledgements by the Executive. The Executive represents to the
---------------------------------
Company that he has not executed any agreement with any other party which
purports to require the Executive to assign any Work or any Invention created,
conceived or first practiced by the Executive during a period of time that
includes the date of his or her commencement of employment with the Company.
SECTION 6
REMEDIES AND DISPUTE RESOLUTION
6.1 Remedies. The Executive agrees that the covenants contained in
--------
Sections 4 and 5 of this Agreement are of the essence of this Agreement; that
each of the covenants is reasonable and necessary to protect the business,
interests and properties of the Company; and that irreparable loss and damage
may be suffered by the Company should he breach any of such covenants. The
Executive agrees and consents that, in addition to all the remedies provided by
law or in equity, so long as the Company is otherwise entitled thereto under
applicable law, the Company will be entitled to a temporary restraining order
and temporary and permanent injunctions to prevent a breach or threatened breach
of the covenants prohibiting disclosure of any Proprietary Technology without
the need for posting bond for temporary injunctions or interlocutory
injunctions. The Company and the Executive agree that all remedies available to
the Company or Executive, as applicable, will be cumulative.
6.2 Right to Set-Off. The Company will have the right to set-off against
----------------
any payment due the Executive for damages actually incurred or suffered by the
Company as a result of any breach of this Agreement by the Executive to the
extent allowed under applicable law. Any application as a set-off of such
amounts against the damages incurred or suffered by the Company as a result of
any breach of this Agreement by the Executive will not be considered in full
satisfaction of or as liquidated damages for or a release of any claims for
damages against the Executive that may accrue to the Company as a result of any
breach of this Agreement by the Executive.
6.3 Resolution of Disputes on Determination of Cause and Breach of
--------------------------------------------------------------
Restrictive Covenants. The parties agree that any controversy or dispute
- ---------------------
regarding whether or not "cause" exists for termination of the Executive's
employment under this Agreement or any determination that the restrictive
covenants and nondisclosure covenants of Sections 4 and 5 have been breached
(each, a "Dispute") that is not resolved by the parties within a reasonable
amount of time may be submitted to binding arbitration administered by the
American Arbitration Association ("AAA") under its Commercial Arbitration Rules,
except where those rules are supplemented or modified by the express terms of
this section. The parties agree that binding arbitration is the exclusive
remedy for resolving any Dispute, except for the right of either party to pursue
injunctive relief pursuant to Section 6.1. Either party may initiate
arbitration by
-8-
<PAGE>
sending notice of its intention to arbitrate the Dispute to the other party,
which notice must be accompanied by a brief setting forth the nature of the
Dispute and the grounds for the existence or non-existence of "cause" or any
breach of the restrictive covenants and nondisclosure covenants of Sections 4
and 5, as the case may be, and the remedy sought, which brief may not exceed 25
typed pages (the "Arbitration Notice"). The party demanding arbitration must
also file at the regional office of the AAA three copies of the Arbitration
Notice and Brief and the arbitration provision of this Agreement together with
the required filing fee. The other party to the arbitration must file a
responsive brief within 15 business days of receipt of the demanding party's
Arbitration Notice and Brief, which responsive brief may not exceed 25 typed
pages. Any arbitration proceedings will be in Washington, D.C. If the parties
are able to agree on one arbitrator within 15 days of the date the Arbitration
Notice is filed with the AAA, the Dispute will be heard by that arbitrator. If
the parties are unable to agree on one arbitrator, then an arbitrator will be
selected from an impartial roster of arbitrators provided by the AAA in
accordance with the AAA rules. There will be no discovery permitted by the
parties in the arbitration proceedings provided that each party will be
permitted to take one oral deposition of the other party or unless otherwise
mutually agreed to by the parties. The Company agrees to be bound by Rule
30(b)(6) of the Federal Rules of Civil Procedures "Deposition of an
Organization," as amended from time to time or any successor rule. The
arbitrator will issue a decision within 30 days of his or her appointment. The
decision of the arbitrator must set forth in reasonable detail the reasoning
supporting the decision of the arbitrator. The decision rendered by the
arbitrator will be final and binding on the parties and judgment on the decision
rendered by the arbitrator may be entered in any court having jurisdiction.
Each party will pay its own costs and expenses related to the arbitration
procedures. This agreement to arbitrate will survive the termination of this
Agreement and is specifically enforceable under the prevailing arbitration law
and survives the termination of this Agreement. Any attempted termination of
this Agreement that results in a Dispute submitted to arbitration will suspend
the termination of this Agreement until resolved by the arbitrator. The parties
further agree that the Company will be entitled to pursue any available
temporary restraining orders or other injunctive relief notwithstanding any
pending arbitration or request for arbitration by the Executive or the Company.
SECTION 7
GENERAL PROVISIONS
7.1 Amendment. This Agreement may not be amended or modified except by an
---------
instrument in writing signed by both parties.
7.2 Entire Agreement. This Agreement constitutes the entire and final
----------------
agreement of the parties regarding the employment of the Executive by the
Company. All prior understandings and agreements relating to the subject matter
of this Agreement, whether written or oral, express or implied, are hereby
expressly terminated.
7.3 Severability. The parties agree that each of the provisions included
------------
in this Agreement is separate, distinct, and severable from the other provisions
of this Agreement, and that the invalidity or unenforceability of any Agreement
provision will not affect the validity or enforceability of any other provision
of this Agreement. Further, if any provision of this
-9-
<PAGE>
Agreement is ruled invalid or unenforceable by a court of competent jurisdiction
because of a conflict between the provision and any applicable law or public
policy, the provision will be redrawn to make the provision consistent with and
valid and enforceable under the law or public policy.
7.4 Notices. All notices and other communications pertaining to this
-------
Agreement must be in writing and delivered personally, telecopied, sent by
nationally-recognized, overnight courier or mailed by registered or certified
mail (return receipt requested), postage prepaid, to the parties at the
following addresses (or at such other address for a party as is specified by
like notice):
If to the Company: Century Services, Inc.
20251 Century Boulevard
Germantown, Maryland 20874
Attention: Chief Executive Officer
Phone: (301) 353-9500
Fax: (301) 353-9501
With a copy to: Powell, Goldstein, Frazer & Murphy
1001 Pennsylvania Avenue, N.W.
Sixth Floor
Washington, D.C. 20004
Attention: Michael H. Chanin, Esq.
Phone: (202) 347-0066
Fax: (202) 624-7222
If to the Executive: Michael C. Higgins
12408 Rivers Edge Drive
Potomac, Maryland 20854
Telephone: (301) 926-6771
All such notices and other communications will be deemed to have been received
(a) in the case of personal delivery, on the date of such delivery, (b) in the
case of a telecopy, upon receipt of electronic or verbal confirmation therefor,
(c) in the case of delivery by nationally-recognized, overnight courier, on the
business day following dispatch and (d) in the case of mailing, on the third
business day following such mailing.
7.5 Assignment. This Agreement and the rights and obligations of the
----------
Company stated in this Agreement may be assigned and delegated by the Company
and will be for the benefit of, binding upon, and enforceable by the assignee.
This Agreement and the rights and obligations of the Executive stated in this
Agreement are personal to the Executive and may not be assigned or delegated by
the Executive.
7.6 Waiver. A waiver by the Company of any breach of this Agreement by
------
the Executive will not be effective unless in writing, and no waiver will
operate or be construed as a waiver of the same or another breach on a
subsequent occasion.
-10-
<PAGE>
7.7 Governing Law. This Agreement will be governed by and construed in
-------------
accordance with the laws of the State of Maryland.
7.8 Enforcement. Each party to this Agreement (i) submits to personal
-----------
jurisdiction in the State of Maryland for the enforcement of this Agreement, and
(ii) waives any and all rights under the laws of any state to object to
jurisdiction within the State of Maryland for the purposes of litigation to
enforce this Agreement.
7.9 Interpretation. Should any provision of this Agreement require a
--------------
judicial interpretation, it is agreed that the judicial body interpreting or
construing this Agreement will not apply the assumption that the terms of this
Agreement will be more strictly construed against one party by reason of the
rule of legal construction that an instrument is to be construed more strictly
against the party that itself or through its agents prepared the agreement. The
parties acknowledge and agree that they and their agents have each participated
equally in the negotiations and preparation of this Agreement.
7.10 Counterparts. This Agreement may be executed in one or more identical
------------
counterparts, each of which will be deemed to be an original and all of which,
when assembled, will constitute one and the same document.
[SIGNATURES ON FOLLOWING PAGE]
-11-
<PAGE>
EXECUTED AS OF NOVEMBER 6, 1996.
CENTURY SERVICES INC.
By: /s/ Norm Wareham
---------------------------------------
Name: Norm Wareham
Title: Chief Financial Officer
EXECUTIVE:
/s/ Michael C. Higgins
---------------------------------------------
Michael C. Higgins
-12-
<PAGE>
EXHIBIT 10.6
FIRST AMENDMENT TO THE EMPLOYMENT AGREEMENT BETWEEN
CENTURY SERVICES, INC. AND MICHAEL C. HIGGINS
THIS FIRST AMENDMENT is made on May 21, 1997, between CENTURY SERVICES,
INC., a Maryland corporation (the "Company"), and Michael C. Higgins, an
individual resident of the State of Maryland (the "Executive").
BACKGROUND
The Company and the Executive entered into an employment agreement (the
"Agreement") on November 6, 1996.
The Company and the Executive now desire to amend the Agreement to provide
for an annual base salary schedule and a bonus of fifty percent of base salary
to be paid twenty-five percent in cash and seventy-five percent in shares of
common stock, par value $.001, of the Company (the "Common Stock").
The Company and the Executive also desire to amend the Agreement to allow
the Compensation Committee of the Company the discretion to award any or all of
the bonus in the event the Executive does not attain the performance criteria or
is terminated by the Company before the end of the year in which the Executive
is to be paid and to remove restrictions in the Agreement that prevent the
Executive from receiving incentives under the incentive plans maintained by the
Company.
AMENDMENT
NOW, THEREFORE, the parties agree that the Agreement is amended, effective
January 1, 1997, as follows:
1. By deleting Section 2.1 in its entirety and substituting the following:
"2.1 Cash Compensation. For all services to be rendered by the
-----------------
Executive under this Agreement, the Company will pay the Executive the
following amounts, which payment will be subject to withholdings for local,
state and federal taxes, social security, and other deductions required by
law or the policies of the Company, from time to time in effect:
(a) Base Salary. The Company will pay the Executive an annual
-----------
gross salary (the "Base Salary") for each fiscal year of the Company
at the following annual rates:
<TABLE>
<CAPTION>
Fiscal Year Base Salary
----------- -----------
<S> <C>
1997 $150,000
1998 $175,000
1999 $200,000
</TABLE>
<PAGE>
The Base Salary will be payable on the Company's standard salary
payment schedule for executive level employees.
(b) Bonus. For each of fiscal year 1997, 1998, and 1999, if the
-----
Executive remains an employee of the Company on the last day of such
fiscal year, Executive will be eligible to receive a bonus of 100
percent of Base Salary if he achieves all performance criteria
established by the Compensation Committee of the Company. Each bonus
will be payable as soon as administratively feasible after the
Company's audited financial statements for the applicable fiscal year
become available. The performance criteria for fiscal year 1997 have
been established as follows: (1) if the Company attains gross revenues
of at least $9 million as shown in the Company's audited financial
statements, the Executive will receive a bonus of fifty percent (50%)
of Base Salary, and in addition, (2) if the Company attains net income
before interest, taxes, and amortization (EBITA) of $200,000 as shown
in the Company's audited financial statements, the Executive will
receive an additional bonus of fifty percent (50%) of Base Salary.
Such bonus for 1997 will be payable twenty-five percent (25%) in cash
and seventy-five percent (75%) in shares of common stock, par value
$.001, of the Company ("Common Stock"). The number of shares of
Common Stock the Executive will receive pursuant to the bonus formula
will be equal to (a) the dollar amount of the bonus payable in the
form of shares of Common Stock divided by (b) the average trade price
per share of Common Stock over the last ten trading days of the fiscal
year for which the shares of Common Stock are granted. In the event
the Executive does not achieve the performance criteria, or any part
thereof, for the fiscal year, the Compensation Committee of the
Company will have the authority and discretion to award the bonus, or
any part thereof. The Compensation Committee of the Company may, in
its discretion, award the Executive the bonus, or any part thereof, in
the event the Executive is terminated by the Company prior to the end
of a fiscal year. For fiscal years 1998 and 1999, the Compensation
Committee of the Company will, no later than 90 days after the
beginning of the fiscal year, set new performance criteria and
establish the percentage of the bonus for such year to be paid in cash
or shares of Common Stock and will promptly communicate the
performance criteria and the payment percentages to the Executive,
thereafter.
2. By adding the following before the period (".") at the end of the first
sentence of Section 3.4:
";provided, however, that such payments will be reduced by any severance,
life insurance, or disability payments to the Executive, his beneficiary,
or estate that are provided under any plan, program, or policy of the
Company or an affiliate, except to the extent the premiums associated with
such payments were paid by the Executive."
<PAGE>
Except as specifically provided herein, the Agreement will remain in full
force and effect as prior to this First Amendment.
The parties have caused this First Amendment to be executed as of the day
and year first above written.
CENTURY SERVICES, INC.
By: /s/ James McCubbin
------------------------------
James McCubbin
Vice President
EXECUTIVE
/s/ Michael C. Higgins
-----------------------------
Michael C. Higgins
<PAGE>
EXHIBIT 10.7
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made on June 18, 1997, to
be effective as of April 17, 1997, between CENTURY SERVICES, INC., a Maryland
corporation (the "Company"), and Joseph Yeh, an individual resident of the State
of Maryland (the "Executive").
BACKGROUND:
The Executive desires to enter into employment with the Company and the
Company desires to employ the Executive.
In consideration of the employment of the Executive by the Company and the
mutual agreements stated below, the parties agree as follows:
STATEMENT OF TERMS:
SECTION 1
DUTIES OF EXECUTIVE
1.1 ENGAGEMENT. The Company employs the Executive, and the Executive
----------
accepts such employment with the Company, subject to the terms and conditions of
this Agreement.
1.2 DUTIES AND RESPONSIBILITIES OF EXECUTIVE. The Executive will be
----------------------------------------
employed as the Senior Vice President-Technology of the Company and will do and
perform all services and acts necessary or advisable to fulfill the duties of
Senior Vice President-Technology of the Company and will conduct and perform
such services and activities as may be determined from time to time by the chief
executive officer of the Company. The Executive will diligently follow and
implement all management policies and decisions of the Company. The Executive
agrees that he has a duty of loyalty to the Company and will not engage in, or
otherwise be interested in, directly or indirectly, any other business or
activity that would materially and adversely affect the Company's business or
the Executive's ability to perform his duties under this Agreement.
1.3 WORKING FACILITIES. The Company, at its expense, will furnish the
------------------
Executive with such office space, office equipment, secretarial help and such
other facilities, equipment and services as the Company determines to be needed
or beneficial for the performance by the Executive of the duties contemplated
under this Agreement. It is anticipated that the Executive will provide
services at and have available for use the Company's facilities at its
headquarters location.
<PAGE>
SECTION 2
COMPENSATION
2.1 CASH COMPENSATION. For all services to be rendered by the Executive
-----------------
under this Agreement, Company will pay the Executive the following amounts,
which payment will be subject to withholdings for local, state and federal
taxes, social security, and other deductions required by law or the policies of
the Company, from time to time in effect:
(a) Base Salary. The Company will pay the Executive an annual gross
-----------
salary (the "Base Salary") of $125,000. The Base Salary will be payable on
the Company's standard salary payment schedule for executive level
employees. The Executive will receive an annual increase in his rate of
Base Salary of ten percent (10%) effective on January 1 of each year
beginning on or after January 1, 1998.
(b) Bonus. For each of fiscal year 1997, 1998, and 1999, if the
-----
Executive remains an employee of the Company on the last day of such fiscal
year, Executive will be eligible to receive a bonus of 100 percent of Base
Salary if he achieves all performance criteria established by the
Compensation Committee of the Company. Each bonus will be payable as soon
as administratively feasible after the Company's audited financial
statements for the applicable fiscal year become available. The
performance criteria for fiscal year 1997 have been established as follows:
(1) if the Company attains gross revenues of at least $9 million as shown
in the Company's audited financial statements, the Executive will receive a
bonus of fifty percent (50%) of Base Salary, and in addition, (2) if the
Company attains net income before interest, taxes, and amortization (EBITA)
of $200,000 as shown in the Company's audited financial statements, the
Executive will receive an additional bonus of fifty percent (50%) of Base
Salary. Such bonus for 1997 will be payable fifty percent (50%) in cash
and fifty percent (50%) in shares of common stock, par value $.001, of the
Company ("Common Stock"). The number of shares of Common Stock the
Executive will receive pursuant to the bonus formula will be equal to (a)
the dollar amount of the bonus payable in the form of shares of Common
Stock divided by (b) the average trade price per share of Common Stock over
the last ten trading days of the fiscal year for which the shares of Common
Stock are granted. In the event the Executive does not achieve the
performance criteria, or any part thereof, for the fiscal year, the
Compensation Committee of the Company will have the authority and
discretion to award the bonus or any part thereof. For fiscal years 1998
and 1999, the Compensation Committee of the Company will, no later than 90
days after the beginning of the fiscal year, set new performance criteria
and establish the percentage of the bonus for such year to be paid in cash
or shares of Common Stock and will promptly communicate the performance
criteria and the payment percentages to the Executive, thereafter.
2.2 BUSINESS EXPENSES. The Executive will be entitled to be reimbursed
-----------------
for all reasonable and necessary expenses incurred by him in connection with the
performance of his duties of employment under this Agreement in accordance with
the policies of the Company. The Executive will, as a condition of any such
reimbursement, submit verification of the nature and amount of such expenses in
accordance with the reimbursement policies from time to time adopted by the
Company.
2
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2.3 FRINGE BENEFITS. The Executive will have the same rights as all other
---------------
employees to participate in all pension and other retirement plans, medical
insurance, life insurance and other fringe benefit programs, as are now or may
hereafter be established by the Company; provided, however, that such fringe
benefits will not be less that those provided by the Company on the date of this
Agreement. The Executive will receive 4 weeks paid vacation per year in
accordance with the Company's policy in effect from time to time.
SECTION 3
TERM AND TERMINATION
3.1 TERM. The term of the Executive's employment under this Agreement
----
commences on the effective date of this Agreement and continues until December
31, 2000 (the "Term"), unless sooner terminated as provided in this Section 3.
3.2 TERMINATION. The Executive's employment under this Agreement may be
-----------
terminated only upon the occurrence of any of the following events:
(a) The death or permanent disability of the Executive. For purposes
of this Section 3.2(a), "permanent disability" means:
(1) the inability of the Executive to perform his duties under
this Agreement for a period of 60 consecutive days due to
accident, illness or any other physical or mental
incapacity, or
(2) a disability of the Executive within the meaning of Section
72(m)(7) of the Internal Revenue Code, that is, the
Executive is unable to engage in any substantial gainful
activity with the Company or any other employer, by reason
of any medically determinable physical or mental impairment
which can be expected to result in death or to be of long,
continued and indefinite duration, or
(3) the Executive becomes entitled to:
(A) disability retirement benefits under the federal Social
Security Act, or
(B) recover benefits under any long term disability plan or
policy maintained by the Company.
(b) The Company's election to terminate the Executive for Cause. For
purposes of this Section 3.2(b), appropriate "Cause" will be
deemed to result for the following activities and the
determination of the existence of
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Cause will be made in good faith by the Board of Directors of the
Company:
(1) any willful failure by the Executive in the performance of
any of his duties pursuant to this Agreement;
(2) any breach of the terms of this Agreement (other than the
covenants contained in Section 4 and 5) by the Executive,
which breach or conduct remains uncured after the expiration
of 10 days following the Executive's receipt of notice of
such breach or conduct;
(3) any breach of the covenants contained in Section 4 and 5 of
this Agreement by the Executive;
(4) conduct by the Executive that amounts to fraud,
misappropriation, dishonesty, embezzlement or similar
conduct against the Company or a customer of the Company,
disparagement, libel or slander of the Company or any
employee, contractor or customer of the Company,
insubordination or willful misconduct in the performance of
his duties and responsibilities under this Agreement;
(5) repeated unexplained absence from the Executive's workplace
or use or abuse of alcohol, drugs or similar items that
interferes with the Executive's ability to perform his
duties;
(6) any personal profit in connection with the business of the
Company or its corporate opportunities in violation of the
corporate opportunity doctrine; or
(7) the conviction of or a plea of guilty or nolo contendere by
---- ----------
the Executive of any felony level crime or crime penalized
by incarceration or lesser crime involving moral turpitude.
(c) The mutual agreement by the Executive and the Company to
terminate the Executive's employment under this Agreement.
3.3 EFFECT OF TERMINATION. Upon the termination of the Executive's
---------------------
employment under this Agreement, the Company will have no further obligation to
the Executive or his personal representative with respect to this Agreement or
his employment by the Company, except for the payment of any compensation
accrued up to the date of termination of this Agreement and unpaid at the date
of such termination, the payment of any severance payments that may be due under
Section 3.4 of this Agreement, the payment of liquidated damages as provided in
this Section 3.3, or as set forth in Section 6.3 regarding its agreement to
arbitrate certain disputes
4
<PAGE>
under this Agreement. In the event the Company terminates the Executive without
Cause, the Company will be obligated to pay the Executive, as liquidated
damages, his Base Salary for the remainder of the Term and will not have any
further liability to the Executive under this Agreement.
3.4 SEVERANCE PAYMENT. In addition to the amounts payable pursuant to
-----------------
Section 3.3, if this Agreement is terminated by the death or permanent
disability of Executive pursuant to Section 3.2(a), the Company will pay to
Executive or Executive's estate all severance payments as set forth in any
addendum to this Agreement then in effect or, if such addendum does not
designate severance payments, severance payments at the annual rate equal to
$125,000 per year for the next nine months in substantially equal installments;
provided, however, that such payments will be reduced by any severance, life
insurance, or disability payments to the Executive, his beneficiary, or estate
that are provided under any plan, program, or policy of the Company or an
affiliate, except to the extent the premiums associated with such payments were
paid by the Executive. Neither the Executive nor the Executive's estate will be
entitled to any bonus or form of employee benefit plan, including, without
limitation, life, health, dental and disability insurance, or the payment of
monies in lieu thereof. The severance payments provided pursuant to this
Section 3.4 will be paid at such times and in such manner as stated in the
addendum to this Agreement or if not so stated as payments normally would be
made under Section 2 and will be subject to deductions and withholding as
provided in Section 2. Notwithstanding anything in this Agreement to the
contrary, the Company will have no obligation to continue any payments due the
Executive, and the Executive will not have any right to receive such payments,
if the Company determines in good faith that the Executive has breached the
covenants in Sections 4 or 5 of this Agreement. In addition, the Company's
obligation to make such severance payments to the Executive under this Agreement
is conditioned upon the Executive's (or his estate's) execution and delivery to
the Company of a release (in form and substance reasonably satisfactory to the
Company) of any and all claims known to the Executive (or his estate) that the
Executive (or his estate) may have against the Company or any officer, director
or Affiliate of the Company (as defined in Section 4.1(a)) at any time up to and
including the date of termination and arising thereafter, excluding the
Company's obligation to make the severance payments.
3.5 SURVIVAL. The obligations of the Executive pursuant to Sections 4, 5
--------
and 6 survive the termination of this Agreement.
SECTION 4
RESTRICTIONS
4.1 CERTAIN DEFINITIONS.
-------------------
(A) "AFFILIATE OF THE COMPANY" means any person or entity controlled
------------------------
by, controlling or under common control with the Company. For purposes of
this definition, the term "control" when used with respect to any person or
entity means the power to
5
<PAGE>
direct the management and policies of such person or entity, directly or
indirectly, whether as an officer or director, through the ownership of
voting securities, by contract or otherwise. The term Affiliate of the
Company specifically includes any subsidiary, parent or franchisee of the
Company or any company or enterprise in which the Company owns more than
10% of the voting securities or similar indicia or ownership.
(B) "BUSINESS OF THE COMPANY" means the business of designing,
-----------------------
producing, marketing, distributing, or providing software
engineering/reengineering products or services.
(C) "COMPETITIVE BUSINESS" means any business of enterprise that
--------------------
competes with the Business of the Company.
(D) "YEAR 2000 SERVICES" means the business of resolution of the Year
------------------
2000 date change problem in software programs and the development and sale
of products and services (including program management, analysis,
assessment, conversion, testing, quality assurance and configuration
management) related thereto whether conducted by the Company or any
Affiliate of the Company.
(E) "YEAR 2000 COMPETITIVE BUSINESS" means any person, firm,
------------------------------
corporation, joint venture or other business entity which competes with the
Year 2000 Services.
4.2 RESTRICTIONS. The Executive agrees to comply with all of the
------------
restrictions set forth below at all times during the terms of this Agreement and
(i) for a period of two years after the termination of employment prior to the
expiration of the Term, except in the event of termination pursuant to Section
3.2(c) or in the event of termination of employment pursuant to Section 3.2(a)
or (ii) in the event of a termination of employment pursuant to Section 3.2(a),
for the period during which the Company is paying severance payments to the
Executive pursuant to Section 3.4.
(A) AGREEMENT NOT TO SOLICIT CUSTOMERS. The Executive will not
----------------------------------
(except with the prior written consent of the Company), either directly or
indirectly, on his own behalf or on behalf of others, solicit, divert or
appropriate or attempt to solicit, divert or appropriate to any Competitive
Business, any Business of the Company from any customer or actively sought
prospective customer of the Company or any Affiliate of the Company (i)
with whom the Company or any Affiliate of the Company has current
agreements relating to the Business of the Company or (ii) with whom active
negotiations are underway and (A) with whom the Executive has dealt in
regard to the Business of the Company or (B) with whom the Executive has
supervised negotiations or business relations or (C) about whom the
Executive has acquired Proprietary Information (as defined in Section
5.1(a)) regarding the needs of such customer or prospective customer for
the Business of the Company or negotiations or business relations with the
Company or any Affiliate of the Company, in the course of his employment.
6
<PAGE>
(B) AGREEMENT NOT TO COMPETE. The Executive will not (except with the
------------------------
prior written consent of the Company) engage in any Year 2000 Competitive
Business, either directly or indirectly, on his own behalf or on behalf of
others, in any capacity that involves duties and responsibilities
substantially similar to those undertaken by him for the Company.
(C) AGREEMENT NOT TO SOLICIT EMPLOYEES. The Executive will not,
----------------------------------
either directly or indirectly, on his own behalf or on behalf of others,
solicit, divert or hire away, or attempt to solicit, divert, or hire away,
any person employed by the Company or any Affiliate of the Company or any
independent contractor of the Company or any Affiliate of the Company that
is providing services relating to the Business of Company at any facility
where the Executive performed services and with whom he had regular contact
in the course of his employment by the Company. The restriction in this
Section 4.2(c) does not apply if the employee or independent contractor
independently initiated contact with the Executive with regard to his or
her employment or retention.
4.3 TOLLING. If the Executive breaches any of the covenants contained in
-------
Section 4 of this Agreement, the running of the period of the restrictions
described in the covenant breached will be tolled during the continuation of any
breach by the Executive and the running of the period of the restriction will
begin again only upon compliance by the Executive with the terms of the covenant
breached.
SECTION 5
PROPRIETARY INFORMATION
5.1 DEFINITIONS.
-----------
(A) "PROPRIETARY INFORMATION" means information related to the Company
-----------------------
or any Affiliate of the Company (1) that derives economic value, actual or
potential, from not being generally known to or readily ascertainable by
other persons who can obtain economic value from its disclosure or use; and
(2) that is the subject of efforts that are reasonable under the
circumstances to maintain its secrecy; and all tangible reproductions or
embodiments of such information. Assuming the criteria in (1) and (2)
above are satisfied, Proprietary Information includes technical and
nontechnical data related to technical and business information, including,
but not being limited to, trade secrets, computer hardware and software,
procedures manuals, methods, compositions, machines, computer programs,
research projects, processes, formulae, data, algorithms, source codes,
object codes, documentation, flow-charts, drawings, correspondence, know-
how, improvements, inventions, techniques, personnel records, pricing
information, sales or marketing plans and strategies, supply sources,
production or merchandising plans, and information concerning the Company's
and any Affiliate of the Company's clients, customers, accounts, employees,
contractors or affiliates. Proprietary Information does not include any
information that (i) is or becomes part of the public domain through no act
7
<PAGE>
or omission attributable to the Executive, (ii) is released after prior
written authorization by the Company, or (iii) is required to be disclosed
by applicable law, regulation or court order; provided that if disclosure
is required by law, the Executive will provide the Company with prompt
notice of such requirement so that the Company may seek an appropriate
protective order.
(B) "THIRD PARTY INFORMATION" means Proprietary Information that has
-----------------------
been disclosed to the Company or an Affiliate of the Company by a third
party and that the Company or such Affiliate of the Company is obligated to
treat as confidential.
(C) "PROPRIETARY TECHNOLOGY" means Proprietary Information relating
----------------------
specifically to the "BIC", "IREW" and "COCACT" software programs owned or
licensed by the Company and any related source codes, object codes,
documentation and manuals relating thereto and any enhancements or
modifications thereof and any other software, source codes, processes,
techniques, trade secrets or know how that may be developed, owned or
licensed by the Company or any Affiliate of the Company relating to the
Business of the Company (as defined in Section 4.1) or other core line of
business in which the Company may become engaged.
5.2 NON-DISCLOSURE. The Executive agrees that during the term of his
--------------
employment by the Company and for the applicable time periods thereafter as
specified below, he will receive all Proprietary Information in trust and that
he will not disclose or make available, directly or indirectly, any Proprietary
Information to any person, concern or entity, except in the proper performance
of his duties and responsibilities under this Agreement or with the prior
written consent of the Company. The Executive will abide by the Company's
policies and regulations, as established from time to time, for the protection
of its Proprietary Information for the time period specified in this Section
5.2. The Executive agrees that the nondisclosure prohibitions described in this
Section 5.2 survive the expiration or termination of this Agreement (i) with
respect to Proprietary Information other than Proprietary Technology for a
period of 2 years, except for Third Party Information as to which the Executive
shall maintain confidentiality so long as the Company or Affiliate of the
Company is required to main confidentiality and (ii) with respect to Proprietary
Technology for so long as the Proprietary Technology retains its status as such
and remains confidential.
5.3 OWNERSHIP OF PROPRIETARY INFORMATION. The Executive acknowledges and
------------------------------------
agrees that all Proprietary Information, and all physical embodiments thereof,
are confidential to and will be and remain the sole and exclusive property of
the Company. Upon request by the Company, and in any event upon termination of
his employment with the Company for any reason, the Executive will promptly
deliver to the Company all property belonging to the Company including, without
limitation, all Proprietary Information (and all embodiments thereof) then in
his custody, control or possession.
8
<PAGE>
5.4 ASSIGNMENT OF INVENTIONS, ETC. The Executive agrees that all
-----------------------------
inventions, discoveries, improvements, processes, techniques, computer programs
or improvements thereto (an "Invention") conceived or first practiced by the
Executive during his employment by the Company, and all patent rights and
copyrights thereto, if any, will become the property of the Company, and the
Executive hereby irrevocably assigns to the Company all of the Executive's
rights to all Inventions.
5.5 WORKS FOR HIRE. The Executive agrees that any Works (as defined
--------------
below) created by the Executive in the course of the Executive's duties as an
employee of the Company are subject to the "Work for Hire" provisions contained
in Sections 101 and 201 of the United States Copyright Law, Title 17 of the
United States Code. "Work" means a copyrightable work of authorship, including
without limitation, any technical descriptions for products, user's guides,
illustrations, advertising materials, computer programs (including the contents
of read only memories) and any contribution to such materials. All right, title
and interest to copyrights in all Works which have been or will be prepared by
the Executive within the scope of his or her employment with the Company will be
the property of the Company. The Executive acknowledges and agrees that, to the
extent the provisions of Title 17 of the United States Code do not vest in the
Company the copyrights to any Works, the Executive hereby assigns to the Company
all right, title and interest to copyrights which the Executive may have in the
Works. The Executive must disclose to the Company all Works and will execute
and deliver all applications, registrations, and documents relating to the
copyrights to the Works and will provide assistance to secure the Company's
title to the copyrights in the Works. The Company will be responsible for all
expenses incurred in connection with the registration of all the copyrights.
5.6 ACKNOWLEDGEMENTS BY THE EXECUTIVE. The Executive represents to the
---------------------------------
Company that he has not executed any agreement with any other party which
purports to require the Executive to assign any Work or any Invention created,
conceived or first practiced by the Executive during a period of time that
includes the date of his or her commencement of employment with the Company.
SECTION 6
REMEDIES AND DISPUTE RESOLUTION
6.1 REMEDIES. The Executive agrees that the covenants contained in
--------
Sections 4 and 5 of this Agreement are of the essence of this Agreement; that
each of the covenants is reasonable and necessary to protect the business,
interests and properties of the Company; and that irreparable loss and damage
may be suffered by the Company should he breach any of such covenants. The
Executive agrees and consents that, in addition to all the remedies provided by
law or in equity, so long as the Company is otherwise entitled thereto under
applicable law, the Company will be entitled to a temporary restraining order
and temporary and permanent injunctions to prevent a breach or threatened breach
of the covenants prohibiting disclosure of any Proprietary Technology without
the need for posting bond for temporary injunctions or
9
<PAGE>
interlocutory injunctions. The Company and the Executive agree that all remedies
available to the Company or Executive, as applicable, will be cumulative.
6.2 RIGHT TO SET-OFF. The Company will have the right to set-off against
----------------
any payment due the Executive for damages actually incurred or suffered by the
Company as a result of any breach of this Agreement by the Executive to the
extent allowed under applicable law. Any application as a set-off of such
amounts against the damages incurred or suffered by the Company as a result of
any breach of this Agreement by the Executive will not be considered in full
satisfaction of or as liquidated damages for or a release of any claims for
damages against the Executive that may accrue to the Company as a result of any
breach of this Agreement by the Executive.
6.3 RESOLUTION OF DISPUTES ON DETERMINATION OF CAUSE AND BREACH OF
--------------------------------------------------------------
RESTRICTIVE COVENANTS. The parties agree that any controversy or dispute
- ---------------------
regarding whether or not "Cause" exists for termination of the Executive's
employment under this Agreement or any determination that the restrictive
covenants and nondisclosure covenants of Sections 4 and 5 have been breached
(each, a "Dispute") that is not resolved by the parties within a reasonable
amount of time may be submitted to binding arbitration administered by the
American Arbitration Association ("AAA") under its Commercial Arbitration Rules,
except where those rules are supplemented or modified by the express terms of
this section. The parties agree that binding arbitration is the exclusive
remedy for resolving any Dispute, except for the right of either party to pursue
injunctive relief pursuant to Section 6.1. Either party may initiate
arbitration by sending notice of its intention to arbitrate the Dispute to the
other party, which notice must be accompanied by a brief setting forth the
nature of the Dispute and the grounds for the existence or non-existence of
"Cause" or any breach of the restrictive covenants and nondisclosure covenants
of Sections 4 and 5, as the case may be, and the remedy sought, which brief may
not exceed 25 typed pages (the "Arbitration Notice"). The party demanding
arbitration must also file at the regional office of the AAA three copies of the
Arbitration Notice and Brief and the arbitration provision of this Agreement
together with the required filing fee. The other party to the arbitration must
file a responsive brief within 15 business days of receipt of the demanding
party's Arbitration Notice and Brief, which responsive brief may not exceed 25
typed pages. Any arbitration proceedings will be in Washington, D.C. If the
parties are able to agree on one arbitrator within 15 days of the date the
Arbitration Notice is filed with the AAA, the Dispute will be heard by that
arbitrator. If the parties are unable to agree on one arbitrator, then an
arbitrator will be selected from an impartial roster of arbitrators provided by
the AAA in accordance with the AAA rules. There will be no discovery permitted
by the parties in the arbitration proceedings provided that each party will be
permitted to take one oral deposition of the other party or unless otherwise
mutually agreed to by the parties. The Company agrees to be bound by Rule
30(b)(6) of the Federal Rules of Civil Procedures "Deposition of an
Organization," as amended from time to time or any successor rule. The
arbitrator will issue a decision within 30 days of his or her appointment. The
decision of the arbitrator must set forth in reasonable detail the reasoning
supporting the decision of the arbitrator. The decision rendered by the
arbitrator will be final and binding on the parties and judgment on the decision
rendered by the arbitrator may be entered in any court having
10
<PAGE>
jurisdiction. Each party will pay its own costs and expenses related to the
arbitration procedures. This agreement to arbitrate will survive the termination
of this Agreement and is specifically enforceable under the prevailing
arbitration law and survives the termination of this Agreement. Any attempted
termination of this Agreement that results in a Dispute submitted to arbitration
will suspend the termination of this Agreement until resolved by the arbitrator.
The parties further agree that the Company will be entitled to pursue any
available temporary restraining orders or other injunctive relief
notwithstanding any pending arbitration or request for arbitration by the
Executive or the Company.
SECTION 7
GENERAL PROVISIONS
7.1 AMENDMENT. This Agreement may not be amended or modified except by an
---------
instrument in writing signed by both parties.
7.2 ENTIRE AGREEMENT. This Agreement constitutes the entire and final
----------------
agreement of the parties regarding the employment of the Executive by the
Company. All prior understandings and agreements relating to the subject matter
of this Agreement, whether written or oral, express or implied, are hereby
expressly terminated.
7.3 SEVERABILITY. The parties agree that each of the provisions included
------------
in this Agreement is separate, distinct, and severable from the other provisions
of this Agreement, and that the invalidity or unenforceability of any Agreement
provision will not affect the validity or enforceability of any other provision
of this Agreement. Further, if any provision of this Agreement is ruled invalid
or unenforceable by a court of competent jurisdiction because of a conflict
between the provision and any applicable law or public policy, the provision
will be redrawn to make the provision consistent with and valid and enforceable
under the law or public policy.
7.4 NOTICES. All notices and other communications pertaining to this
-------
Agreement must be in writing and delivered personally, telecopied, sent by
nationally-recognized, overnight courier or mailed by registered or certified
mail (return receipt requested), postage prepaid, to the parties at the
following addresses (or at such other address for a party as is specified by
like notice):
If to the Company:
Century Services, Inc.
20251 Century Boulevard
Germantown, Maryland 20874
Attention: Chief Executive Officer
Phone: (301) 353-9500
Fax: (301) 353-9501
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With a copy to:
Powell, Goldstein, Frazer & Murphy LLP
1001 Pennsylvania Avenue, N.W.
Sixth Floor
Washington, D.C. 20004
Attention: Michael H. Chanin, Esq.
Phone: (202) 347-0066
Fax: (202) 624-7222
If to the Executive:
Joseph Yeh
9419 Lost Trail Way
Potomac, Maryland 20854
Phone: (301) 983-2997
All such notices and other communications will be deemed to have been received
(a) in the case of personal delivery, on the date of such delivery, (b) in the
case of a telecopy, upon receipt of electronic or verbal confirmation therefor,
(c) in the case of delivery by nationally-recognized, overnight courier, on the
business day following dispatch and (d) in the case of mailing, on the third
business day following such mailing.
7.5 ASSIGNMENT. This Agreement and the rights and obligations of the
----------
Company stated in this Agreement may be assigned and delegated by the Company
and will be for the benefit of, binding upon, and enforceable by the assignee.
This Agreement and the rights and obligations of the Executive stated in this
Agreement are personal to the Executive and may not be assigned or delegated by
the Executive.
7.6 WAIVER. A waiver by the Company of any breach of this Agreement by
------
the Executive will not be effective unless in writing, and no waiver will
operate or be construed as a waiver of the same or another breach on a
subsequent occasion.
7.7 GOVERNING LAW. This Agreement will be governed by and construed in
-------------
accordance with the laws of the State of Maryland.
7.8 ENFORCEMENT. Each party to this Agreement (i) submits to personal
-----------
jurisdiction in the State of Maryland for the enforcement of this Agreement, and
(ii) waives any and all rights under the laws of any state to object to
jurisdiction within the State of Maryland for the purposes of litigation to
enforce this Agreement.
7.9 INTERPRETATION. Should any provision of this Agreement require a
--------------
judicial interpretation, it is agreed that the judicial body interpreting or
construing this Agreement will not apply the assumption that the terms of this
Agreement will be more strictly construed against one party by reason of the
rule of legal construction that an instrument is to be construed more strictly
12
<PAGE>
against the party that itself or through its agents prepared the agreement. The
parties acknowledge and agree that they and their agents have each participated
equally in the negotiations and preparation of this Agreement.
7.10 COUNTERPARTS. This Agreement may be executed in one or more identical
------------
counterparts, each of which will be deemed to be an original and all of which,
when assembled, will constitute one and the same document.
EXECUTED AS OF June 18, 1997.
CENTURY SERVICES INC.
By: /s/ Michael C. Higgins
------------------------
Michael C. Higgins
President
EXECUTIVE:
/s/ Joseph Yeh
-----------------------------
Joseph Yeh
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<PAGE>
Exhibit 10.8
SEPARATION AGREEMENT
THIS SEPARATION AGREEMENT (this "Agreement") is made on April 22, 1997,
between MICHAEL S. CANNON, a resident of the Commonwealth of Virginia (the
"Executive"), and CENTURY SERVICES, INC., a Maryland corporation, and any of its
employees, managers, attorneys, agents, officers, directors, owners, members and
affiliates, including ZMAX Corporation, the parent company of Century Services,
Inc. (hereinafter collectively referred to as the "Company").
BACKGROUND
A. The Executive was employed by the Company pursuant to an employment
agreement dated November 6, 1996 between Century Services, Inc. and the
Executive (the "Employment Agreement").
B. The Executive and the Company wish to terminate the Executive's
employment with the Company effective at the close of business on April 22,
1997.
C. The Executive desires to accept the following agreements, including,
without limitation, certain additional consideration from the Company in return
for the general release and non-disclosure agreements set forth below.
D. The Executive and the Company desire to settle fully and finally all
matters among them including any that might arise or have arisen out of the
Executive's employment with the Company and the Executive's mutual voluntary
termination.
AGREEMENT
---------
In consideration of the premises and mutual promises herein contained, the
parties agree as follows:
1. Effective Date. The effective date (the "Effective Date") of the
--------------
Agreement will be the date eight (8) days after the date on which the Executive
signs this Agreement as indicated on the signature page hereto.
2. Voluntary Termination of Employment. The Executive represents,
------------------------------------
understands and agrees that he and the Company have mutually and voluntarily
agreed to terminate his employment with the Company effective April 22, 1997.
The Executive represents, understands and agrees that any agreement between the
Executive and the Company or Company policy in connection with his employment as
Executive Vice President of the Company, whether written or oral, is terminated
by mutual agreement pursuant to this Agreement and the consideration provided by
the Company under this Agreement is in lieu of any consideration owed to the
Executive under any such agreement or policy, except as otherwise provided by or
contemplated by the terms of this Agreement.
<PAGE>
3. Consideration. As consideration for entering into this Agreement, the
-------------
Company agrees to take the following actions:
(a) Separation Payment. The Company agrees to pay the Executive a
------------------
separation payment equal to $100,000 per annum commencing on April 27, 1997,
through and including November 6, 1999, which amount will be pro rated for any
partial year and will be payable in installments on the Company's standard
salary payment schedule for executive level employees (the "Separation Payment")
on the Effective Date. The Separation Payment to be made pursuant to this
Section 3(a) will be subject to withholdings for local, state and federal taxes,
social security and other deductions required by law or the policies of the
Company, from time to time.
(b) Reimbursements for COBRA Coverage. Upon request by the Executive,
---------------------------------
the Company will reimburse the Executive for any monthly premium payments made
by the Executive to continue the medical and dental coverages presently in
effect for himself and his dependents by exercise of his rights under the
Consolidated Omnibus Budget Reconciliation Act of 1986 ("COBRA") for the period
commencing on April 22, 1997 and ending on July 22, 1997. The Company will
reimburse the Executive as soon as practicable after the Executive tenders to
the Company written evidence of his payment of a periodic COBRA premium payment.
The Executive will be entitled to continue coverage under COBRA, unreimbursed by
the Company, for the remainder of the period of required COBRA continuation
coverage as described in Section 4 below.
(c) Consulting Agreement. The Company will enter into a consulting
--------------------
agreement with the Executive in substantially the form of the Consulting
Agreement attached hereto as Exhibit A (the "Consulting Agreement").
---------
4. Welfare Coverages. The Executive may exercise his right under COBRA to
-----------------
continue those medical and dental coverages which are then currently available
to the Company's employees generally by making monthly payments for such
coverages to the Company, subject to such terms and conditions as apply to any
former employee entitled to exercise his or her COBRA rights. Executive
acknowledges that the 18-month continuation period for these coverages commences
April 22, 1997. Executive understands and agrees that Executive's coverages
under the Company's other "welfare plans," within the meaning of Section 3(1) of
the Employee Retirement Income Security Act of 1974, as amended, ceased as of
April 22, 1997.
5. Earn Out Stock. The Executive acknowledges that 1,400,000 shares of
--------------
ZMAX Corporation ("ZMAX") common stock (the "Earn out Stock") is subject to earn
out and is being held in escrow pursuant to an Earn Out Stock Escrow Agreement
dated November 6, 1996 among ZMAX, the Executive, Michael C. Higgins ("Higgins")
and the escrow agent named therein. The Executive acknowledges and agrees that
his Earn Out Stock will be released from the Earn Out Stock Escrow Agreement on
the same schedule and on the same terms as any earn out shares held by Higgins
and, until released, such shares will remain subject to the Earn Out Stock
Escrow Agreement.
-2-
<PAGE>
6. Cessation of Authority. Except as otherwise expressly provided in this
----------------------
Agreement, the Executive understands and agrees that effective April 22, 1997,
he was and is no longer authorized to incur any expenses, obligations or
liabilities, or to make any commitments on behalf of the Company. Except as
otherwise contemplated by Section 3(b), the Executive agrees to submit to the
Company on or before May 30, 1997 any and all expenses incurred by him and
reimbursable by the Company.
7. Resignation and Certain Acknowledgements. The Executive hereby resigns
----------------------------------------
all positions as a director or officer of the Company effective as of April 22,
1997. The Executive relinquishes all rights to become a board member of the
Company and ZMAX, including those granted under a certain letter agreement dated
November 6, 1996.
8. Availability to Testify. The Executive agrees that he will make
-----------------------
himself available for depositions and courtroom testimony and as otherwise
reasonably requested by legal counsel to the Company to participate in any legal
proceedings brought by or against the Company concerning matters where the facts
in dispute pertain to the period during which the Executive served as Executive
Vice President of the Company. The Company will pay the Executive's reasonable
expenses incurred in connection with such proceedings and, in the event that the
Executive expends extensive amounts of time to participate in such proceedings,
the Company will pay the Executive reasonable compensation for such time.
9. Return of Company Materials and Property. The Executive will promptly
----------------------------------------
turn over to the Company all files, memoranda, records, credit cards and other
documents, physical or personal property including, without limitation, any
materials which he received from the Company or which he used in the course of
his employment with the Company and which are the property of the Company. The
Executive agrees, represents and acknowledges that as a result of his employment
with the Company, he has had in his custody, possession and control proprietary
documents, data, materials, files and similar items concerning Proprietary
Information (as defined below) of the Company and the Executive acknowledges,
warrants and agrees that he has returned all such items and any copies or
excerpts thereof and any other property, files or documents obtained as a result
of his employment as Executive Vice President of the Company, that he has held
all such information in trust and strictest confidence, and that he has complied
and will comply with the Company's policies regarding Proprietary Information.
10. Continuation of Restrictive Covenants and Non-disclosure Agreements.
-------------------------------------------------------------------
The Executive acknowledges and agrees that he continues to be subject to the
restrictive covenants, including non-competition and non-solicitation, and the
non-disclosure agreements set forth in Sections 4 and 5 of the Employment
Agreement, which restrictions and agreements will survive for the time periods
set forth in the Employment Agreement. [These provisions are attached as Exhibit
b.]
11. Agreement Not to Disparage. The Executive will refrain from taking
--------------------------
any action or making any statements, written or oral, which are intended to and
do disparage the goodwill or reputation of the Company, its members, directors,
officers or employees or which could adversely affect the morale of Company
employees.
-3-
<PAGE>
12. Breach. In the event the Executive breaches any term or provision of
-------
this Agreement or the restrictive covenants and agreements that survive under
the Employment Agreement, the Company will be fully and completely relieved of
all remaining obligations under Section 3 hereof and the Consulting Agreement
will be deemed to be terminated, null and void and of no further force or
effect.
13. Certain Acknowledgements. The Executive acknowledges and agrees that
------------------------
all of his shares of Corporation common stock is pledged to ZMAX pursuant to a
Stock Pledge and Security Agreement dated November 6, 1996 from the Executive in
favor of ZMAX and will remain subject to such Stock Pledge and Security
Agreement until such agreement is terminated on August 6, 1997.
14. Non-Admission of Liability. This Agreement will not in any way be
--------------------------
construed as an admission by the Company or the Executive that it has acted
wrongfully with respect to the other or any other person, or that the Company or
the Executive has any rights whatsoever against the other, and the Company and
the Executive specifically disclaim any liability to or wrongful acts against
the other or any other person.
15. Severability. The provisions of this Agreement are severable, and if
------------
any part of it is found to be unenforceable, the other paragraphs will remain
full, valid and enforceable. This Agreement will survive the termination of
any arrangements contained herein.
16. Confidentiality. The Executive represents and agrees that he will
---------------
keep the terms, amount, value and nature of consideration paid to him, and the
fact of this Agreement completely confidential, and that he will not hereafter
disclose any information concerning this Agreement to anyone other than his
immediate family and professional representatives who will be informed of and
bound by this confidentiality clause. Reciprocally, the Company agrees to keep
this same information confidential and will disclose it only to members of the
Board of Directors of the Company or its officers who have a "need to know" or
professional representatives of the Company who will be informed of and
requested to abide by this confidentiality clause. Notwithstanding the
foregoing, either the Executive or the Company may disclose this same
information to the extent disclosure is necessary in the course of any legal or
administrative proceeding.
17. Consultation with an Attorney; Twenty-One (21) Days to Decide. The
-------------------------------------------------------------
Company advises the Executive to consult with an attorney prior to executing
this Agreement. The Executive agrees that he has had the opportunity to consult
counsel. The Executive further acknowledges that he has been given up to
twenty-one (21) days to decide whether he wishes to execute this Agreement, that
he has had ample time in which to execute this Agreement and that he has had
sufficient time to read and consider this Agreement before executing it. The
Executive acknowledges that he is responsible for any costs and fees resulting
from his attorney reviewing this Agreement. The Executive agrees that he has
carefully read this Agreement and understands its contents, that he signs this
Agreement voluntarily, with a full understanding of its significance, and
intending to be bound by its terms.
-4-
<PAGE>
18. Right to Revoke. The Executive may revoke and cancel this Agreement
---------------
at any time within seven (7) days after the Executive's execution of this
Agreement by providing written notice of revocation to the Company at the
address set forth on the signature page of this Agreement. If the Executive
does so revoke, this Agreement will be null and void and the Company will have
no obligation to provide the consideration specified in Section 3 above. This
Agreement will not become effective and enforceable until after the expiration
of this seven (7) day revocation period; after such time, if there has been no
revocation, the Agreement will be fully effective and enforceable.
19. Complete Release by Executive. As a material inducement to the
-----------------------------
Company to enter into this Agreement and in consideration of the payments to be
made and actions to be taken in Section 3 hereof, the Executive hereby
irrevocably and unconditionally releases, acquits and forever discharges the
Company, from any and all charges, complaints, claims, liabilities, obligations,
promises, agreements, controversies, damages, actions, causes of action, suits,
rights, demands, costs, losses, debts and expenses of any nature whatsoever,
known or unknown, suspected or unsuspected, including, but not limited to,
rights arising out of alleged violations or breaches of any contracts, express
or implied, or any tort, or any legal restrictions on the Company's right to
terminate employees, or any federal, state or other governmental statute,
regulation, or ordinance, including, without limitation: (a) Title VII of the
Civil Rights Act of 1964, as amended by the Civil Rights Act of 1991, (race,
color, religion, sex, and national origin discrimination); (b) the Americans
with Disabilities Act (disability discrimination); (c) 42 U.S.C. (S) 1981
(discrimination); (d) 29 U.S.C. (S)(S) 621-624 (the Age Discrimination in
Employment Act); (e) 29 U.S.C. (S) 206(d)(1) (equal pay); (f) Executive Order
11246 (race, color, religion, sex and national origin discrimination); (g)
Executive Order 11141 (age discrimination); (h) Section 503 of the
Rehabilitation Act of 1973 (handicap discrimination); (i) intentional or
negligent infliction of emotional distress or "outrage"; (j) defamation; (k)
interference with employment; (l) wrongful discharge; and (m) invasion of
privacy, ("Claim" or "Claims"), which the Executive now has, owns or holds, or
claims to have, own or hold, or which the Executive at any time heretofore had,
owned or held, or claimed to have, owned or held, against the Company at any
time up to and including the Effective Date of this Agreement.
20. Complete Release by the Company. As a material inducement to the
-------------------------------
Executive to enter into this Agreement and in consideration of the agreements
made hereunder by the Executive, the Company hereby irrevocably and
unconditionally releases, acquits and forever discharges the Executive from any
and all Claims, which the Company now has, owns or holds, or claims to have, own
or hold, or which the Company at any time heretofore had, owned or held, or
claimed to have, owned or held, against the Executive at any time up to and
including the Effective Date of this Agreement.
21. Indemnification. As a further material inducement to the Company to
---------------
enter into this Agreement, the Executive hereby agrees to indemnify and hold the
Company harmless from and against any and all loss, costs, damages or expenses,
including, without limitation, attorneys' fees incurred by the Company, arising
out of any breach of this Agreement by the Executive or the fact that any
representation made herein by the Executive was false when made.
-5-
<PAGE>
As a further material inducement to the Executive to enter into this Agreement,
the Company hereby agrees to indemnify and hold the Executive harmless from and
against any and all loss, costs, damages or expenses, including, without
limitation, attorneys' fees incurred by the Executive, arising out of any breach
of this Agreement by the Company or the fact that any representation made herein
by the Company was false when made or in connection with the Executive's
participation in any proceedings pursuant to Section ____ of this Agreement.
22. No Other Representations. The Executive represents and acknowledges
------------------------
that in executing this Agreement he does not rely, and has not relied, upon any
representation or statement not set forth herein made by the Company with regard
to the subject matter, basis or effect of this Agreement or otherwise.
23. Sole and Entire Agreement. This Agreement sets forth the entire
-------------------------
agreement between the parties hereto, and supersedes any and all prior
agreements or understandings between the parties pertaining to the subject
matter hereof.
-6-
<PAGE>
EXECUTED AS OF April 22, 1997.
/s/ Michael S. Cannon
--------------------------------------------
Michael S. Cannon
DATE:
---------------------------------------
Sworn to and subscribed before me this day
------
of , 1997.
--------------
- ---------------------
NOTARY PUBLIC
My Commission Expires:
[NOTARY SEAL]
CENTURY SERVICES, INC.
By: /s/ Michael C. Higgins
-----------------------------------
Michael C. Higgins
President
Address:
20251 Century Boulevard
Germantown, Maryland 20874
Attn: President
DATE:
-----------------------------------
-7-
<PAGE>
EXHIBIT A
FORM OF CONSULTING AGREEMENT
<PAGE>
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT (this "Agreement") is made on April 22, 1997,
between CENTURY SERVICES, INC., a Maryland corporation (the "Company"), and
MICHAEL S. CANNON, a resident of the Commonwealth of Virginia (the
"Consultant").
BACKGROUND
The Company desires to retain the services of the Consultant so that he
will be available as required by the Company to provide consultation to the
Company relating to sales and marketing of the Company and its products and
services the Consultant desires to accept such engagement on the terms and
conditions set forth in this Agreement.
AGREEMENT
---------
In consideration of the above and the retention of the Consultant by the
Company, and the mutual agreements hereinafter set forth, the parties agree as
follows:
1. Engagement as a Consultant. The Company hereby retains the Consultant,
--------------------------
and the Consultant hereby accepts such engagement by the Company, upon the terms
and conditions of this Agreement.
2. Duties. The Consultant is engaged to be available on a reasonable on-
------
call basis to provide consulting services only as requested by the President of
the Company related to the sales and marketing activities of the Company and its
products and services and will perform and discharge well and faithfully all
such services as may be reasonably requested of him from time to time by the
President of the Company. All funds and property received by the Consultant on
behalf of the Company will be received and held by the Consultant in trust for
the Company, and the Consultant will account for and remit all such funds to the
Company, as applicable.
3. Consulting Fee. The services of Consultant hereunder are compensated
--------------
by the "Separation Payment" provided in Section 3(a) of the Separation Agreement
made as of April 22, 1997, between the Consultant and the Company and no other
fee is due Consultant for his services hereunder.
4. Reimbursement of Expenses. The Consultant will be entitled to be
-------------------------
reimbursed in accordance with the policies of the Company, as adopted and
amended from time to time, for all reasonable and necessary expenses incurred by
him in connection with the performance of consulting services pursuant to this
Agreement; provided that the Consultant will, as a condition of such
reimbursement, submit acceptable verification of the nature and amount of such
expenses in accordance with the reimbursement policies from time to time adopted
by the Company. The Consultant will receive no compensation in addition to that
set forth in this Agreement for any consulting services rendered by him to the
Company.
5. Term and Termination. The term of the engagement of the Consultant by
--------------------
the Company will commence on the date of this Agreement and will continue until
November 6, 1999, unless sooner terminated by notice from either party to the
other.
6. Restrictive Covenants; Non-Disclosure. The Consultant acknowledges and
-------------------------------------
agrees that the non-competition, non-solicitation and non-disclosure covenants
and agreements imposed on the Consultant by virtue of Sections 4 and 5 of that
certain Employment Agreement dated November 6, 1996 between the Consultant and
the Company will apply at all times during any period during which the
Consultant is performing services on behalf of the Company under this Agreement.
<PAGE>
7. Right of Set-Off and Indemnification.
------------------------------------
(a) The Company hereby agrees to indemnify, defend and hold harmless
the Consultant from and against all damages (including reasonable attorneys'
fees) incurred or suffered by the Consultant resulting from, arising out of or
in connection with the performance by the Consultant of its duties under this
Agreement pursuant to the Company's instructions.
(b) The Consultant represents to the Company that the Consultant is
not bound by any agreement or arrangement, whether written or oral, that (1) may
obligate the Consultant to do any act or make any commitment in conflict with
this Agreement, or (2) may prevent the Consultant from performing consulting
services hereunder in the manner and to the extent required by this Agreement.
(c) The Consultant hereby agrees to indemnify, defend and hold
harmless the Company and any of its subsidiaries and affiliates and their
successors and assigns and the officers and directors of all such companies (the
"Indemnified Parties"), from and against all damages (including attorneys' fees)
incurred or suffered by the Indemnified Parties resulting from, arising out of
or in connection with any breach by the Consultant of this Agreement.
(d) The Company will have the right upon written notice to the
Consultant to set-off against any payment due from the Company to the Consultant
for damages incurred or suffered by the Indemnified Parties as a result of any
breach of this Agreement or any other agreement between the Consultant and the
Company and for any payments due from the Consultant to the Company. Any
application as a set-off of any such sums will not be considered in full
satisfaction of or as liquidated damages for or as a release of any claim for
damages against the Consultant which may accrue to the Company as a result of
any such matter.
(e) The existence of any claim, demand, action or cause of action of
the Consultant against any Indemnified Party, whether predicated upon this
Agreement or otherwise, will not constitute a defense to the enforcement by the
Company of any of the covenants or agreements between the Consultant and the
Company.
8. Miscellaneous.
-------------
(a) This Agreement may be assigned by the Company to any entity into
which the Company may be merged or consolidated or which may be a successor to
the Company and will inure to the benefit of any such assignee. This Agreement
and the right of the Consultant to receive compensation or other payments
hereunder is personal to the Consultant. The Consultant may not sell, assign,
transfer, convey, pledge, encumber or hypothecate in any way, his rights,
services and obligations under this Agreement without the prior written consent
of the Company. This Agreement may be amended only by a writing signed by the
parties hereto (but without the consent of any other person). The waiver by the
Company of any breach of this Agreement by the Consultant will not be effective
unless in writing, and no such waiver will operate or be construed as the waiver
of the same or another breach on a subsequent occasion. This Agreement and the
rights of the parties hereunder will be governed by and construed in accordance
with the laws of the State of Maryland. This Agreement embodies the entire
agreement of the parties hereto relating to the consulting services the
Consultant is to provide to the Company and, except as specifically provided
herein, no provisions of any other agreement or document will be deemed to
modify the terms of this Agreement. All other prior understandings and
agreements relating to the engagement of the Consultant to provide consulting
services are hereby expressly terminated.
-2-
<PAGE>
(b) Any notice required or permitted to be given to the parties
pursuant to this Agreement must be in writing, and deemed given and effective
when personally delivered, sent by fax with confirmation of receipt, or when
deposited in the United States mail at the addresses set forth on the signature
page of this Agreement or at such other address as the parties may designate by
written notice to the other given in accordance with this Section 8(b).
(c) The Consultant will act as an independent contractor and not as,
and will not hold himself out as, an employee or agent in performing services
under this Agreement. The Consultant will have no authority to bind the
Company.
EXECUTED AS OF April 22, 1997
CENTURY SERVICES, INC.
By: /s/ Michael C. Higgins
-----------------------------------
Michael C. Higgins
President
Address:
20251 Century Boulevard
Germantown, Maryland 20874
Attn: President
/s/ Michael S. Cannon
----------------------------------------
Michael S. Cannon
Address:
46367 Hampshire Station
Sterling, Virginia 20165
-3-
<PAGE>
EXHIBIT B
[PROVISIONS OF EMPLOYMENT AGREEMENT
INCORPORATED INTO SEPARATION AGREEMENT]
--------------------------------------
SECTION IV
RESTRICTIONS
A. Certain Definitions.
-------------------
1. "Affiliate of the Company" means any person or entity controlled
------------------------
by, controlling or under common control with the Company. For purposes of
this definition, the term "control" when used with respect to any person or
entity means the power to direct the management and policies of such person
or entity, directly or indirectly, whether as an officer or director,
through the ownership of voting securities, by contract or otherwise. The
term Affiliate of the Company specifically includes any subsidiary, parent
or franchisee of the Company or any company or enterprise in which the
Company owns more than 10% of the voting securities or similar indicia or
ownership.
2. "Business of the Company" means the business of resolution of the
-----------------------
Year 2000 date change problem in software programs and the development and
sale of products and services related thereto whether conducted by the
Company or any Affiliate of the Company.
3. "Competitive Business" means any business of enterprise that
--------------------
competes with the Business of the Company.
B. Restrictions. The Executive agrees to comply with all of the
------------
restrictions set forth below at all times during the terms of this Agreement and
(i) for a period of two years after the termination of this Agreement by the
Company pursuant to Section 3.2(b) or by the Executive pursuant to Section
3.2(d) so long as the Company is not in breach of this Agreement or (ii) for the
period during which the Company is paying severance payments to the Executive
pursuant to Section 3.4.
1. Agreement Not to Solicit Customers. The Executive will not
----------------------------------
(except with the prior written consent of the Company), either directly or
indirectly, on his own behalf or on behalf of others, solicit, divert or
appropriate or attempt to solicit, divert or appropriate to any Competitive
Business, any Business of the Company from any customer or actively sought
prospective customer of the Company or any Affiliate of the Company (i)
with whom the Company or any Affiliate of the Company has current
agreements relating to the Business of the Company or (ii) with whom active
negotiations are underway and (A) with whom the Executive has dealt in
regard to the Business of the Company or (B) with whom the Executive has
supervised negotiations or business relations or (C) about whom
<PAGE>
the Executive has acquired Proprietary Information (as defined in Section
5.1(a)) regarding the needs of such customer or prospective customer for
the Business of the Company or negotiations or business relations with the
Company or any Affiliate of the Company, in the course of his employment.
2. Agreement Not to Compete. The Executive will not (except with the
------------------------
prior written consent of the Company) engage in any Competitive Business,
either directly or indirectly, on his own behalf or on behalf of others, in
any capacity that involves duties and responsibilities substantially
similar to those undertaken by him for the Company.
3. Agreement Not to Solicit Employees. The Executive will not,
----------------------------------
either directly or indirectly, on his own behalf or on behalf of others,
solicit, divert or hire away, or attempt to solicit, divert, or hire away,
any person employed by the Company or any Affiliate of the Company or any
independent contractor of the Company or any Affiliate of the Company that
is providing services relating to the Business of Company at any facility
where the Executive performed services and with whom he had regular contact
in the course of his employment by the Company. The restriction in this
Section 4.2(c) does not apply if the employee or independent contractor
independently initiated contact with the Executive with regard to his or
her employment or retention.
C. Tolling. If the Executive breaches any of the covenants contained in
-------
Section 4 of this Agreement, the running of the period of the restrictions
described in the covenant breached will be tolled during the continuation of any
breach by the Executive and the running of the period of the restriction will
begin again only upon compliance by the Executive with the terms of the covenant
breached.
D. Non-Applicability of Restrictions. The Company agrees that the
---------------------------------
restrictions contained in this Section 4 do not apply after expiration of this
Agreement by its own terms.
SECTION V.
PROPRIETARY INFORMATION
E. Definitions.
-----------
1. "Proprietary Information" means information related to the Company
-----------------------
or any Affiliate of the Company (1) that derives economic value, actual or
potential, from not being generally known to or readily ascertainable by
other persons who can obtain economic value from its disclosure or use; and
(2) that is the subject of efforts that are reasonable under the
circumstances to maintain its secrecy;
<PAGE>
and all tangible reproductions or embodiments of such information.
Assuming the criteria in (1) and (2) above are satisfied, Proprietary
Information includes technical and nontechnical data related to technical
and business information, including, but not being limited to, trade
secrets, computer hardware and software, procedures manuals, methods,
compositions, machines, computer programs, research projects, processes,
formulae, data, algorithms, source codes, object codes, documentation,
flow-charts, drawings, correspondence, know-how, improvements, inventions,
techniques, personnel records, pricing information, sales or marketing
plans and strategies, supply sources, production or merchandising plans,
and information concerning the Company's and any Affiliate of the Company's
clients, customers, accounts, employees, contractors or affiliates.
Proprietary Information does not include any information that (i) is or
becomes part of the public domain through no act or omission attributable
to the Executive, (ii) is released after prior written authorization by the
Company, or (iii) is required to be disclosed by applicable law, regulation
or court order; provided that if disclosure is required by law, the
Executive will provide the Company with prompt notice of such requirement
so that the Company may seek an appropriate protective order.
2. "Third Party Information" means Proprietary Information that has
-----------------------
been disclosed to the Company or an Affiliate of the Company by a third
party and that the Company or such Affiliate of the Company is obligated to
treat as confidential.
3. "Proprietary Technology" means Proprietary Information relating
----------------------
specifically to the "BIC", "IREW" and "COCACT" software programs owned or
licensed by the Company and any related source codes, object codes,
documentation and manuals relating thereto and any enhancements or
modifications thereof and any other software, source codes, processes,
techniques, trade secrets or know how that may be developed, owned or
licensed by the Company or any Affiliate of the Company relating to the
Business of the Company (as defined in Section 4.1) or other core line of
business in which the Company may become engaged.
F. Non-Disclosure. The Executive agrees that during the term of his
--------------
employment by the Company and for the applicable time periods thereafter as
specified below, he will receive all Proprietary Information in trust and that
he will not disclose or make available, directly or indirectly, any Proprietary
Information to any person, concern or entity, except in the proper performance
of his duties and responsibilities under this Agreement or with the prior
written consent of the Company. The Executive will abide by the Company's
policies and regulations, as established from time to time, for the protection
of its Proprietary Information for the time period specified in this
<PAGE>
Section 5.2. The Executive agrees that the nondisclosure prohibitions described
in this Section 5.2 survive the expiration or termination of this Agreement (i)
with respect to Proprietary Information other than Proprietary Technology for a
period of 2 years, except for Third Party Information as to which the Executive
shall maintain confidentiality so long as the Company or Affiliate of the
Company is required to main confidentiality and (ii) with respect to Proprietary
Technology for so long as the Proprietary Technology retains its status as such
and remains confidential.
G. Ownership of Proprietary Information. The Executive acknowledges and
------------------------------------
agrees that all Proprietary Information, and all physical embodiments thereof,
are confidential to and will be and remain the sole and exclusive property of
the Company. Upon request by the Company, and in any event upon termination of
his employment with the Company for any reason, the Executive will promptly
deliver to the Company all property belonging to the Company including, without
limitation, all Proprietary Information (and all embodiments thereof) then in
his custody, control or possession.
H. Assignment of Inventions, Etc. The Executive agrees that all
-----------------------------
inventions, discoveries, improvements, processes, techniques, computer programs
or improvements thereto (an "Invention") conceived or first practiced by the
Executive during his employment by the Company, and all patent rights and
copyrights thereto, if any, will become the property of the Company, and the
Executive hereby irrevocably assigns to the Company all of the Executive's
rights to all Inventions.
I. Works for Hire. The Executive agrees that any Works (as defined
--------------
below) created by the Executive in the course of the Executive's duties as an
employee of the Company are subject to the "Work for Hire" provisions contained
in Sections 101 and 201 of the United States Copyright Law, Title 17 of the
United States Code. "Work" means a copyrightable work of authorship, including
without limitation, any technical descriptions for products, user's guides,
illustrations, advertising materials, computer programs (including the contents
of read only memories) and any contribution to such materials. All right, title
and interest to copyrights in all Works which have been or will be prepared by
the Executive within the scope of his or her employment with the Company will be
the property of the Company. The Executive acknowledges and agrees that, to the
extent the provisions of Title 17 of the United States Code do not vest in the
Company the copyrights to any Works, the Executive hereby assigns to the Company
all right, title and interest to copyrights which the Executive may have in the
Works. The Executive must disclose to the Company all Works and will execute
and deliver all applications, registrations, and documents relating to the
copyrights to the Works and will provide assistance to secure the Company's
title to the copyrights in the Works. The Company will
<PAGE>
be responsible for all expenses incurred in connection with the registration of
all the copyrights.
J. Acknowledgements by the Executive. The Executive represents to the
---------------------------------
Company that he has not executed any agreement with any other party which
purports to require the Executive to assign any Work or any Invention created,
conceived or first practiced by the Executive during a period of time that
includes the date of his or her commencement of employment with the Company.
<PAGE>
Exhibit 10.9
CONSULTING AGREEMENT
--------------------
THIS AGREEMENT is made effective 1st April, 1997 (the "Effective Date")
between ZMAX Corporation, a Nevada corporation (the "Company"), and MBY, Inc., a
Delaware corporation, (the "Consultant") and Michel Berty.
INTRODUCTION
------------
The Company, the Consultant, and Michel Berty desire to enter into an
agreement whereby the Consultant will perform services as an independent
contractor to the Company and all services to be performed by the Consultant
shall be performed on behalf of the Consultant by Michel Berty.
NOW, THEREFORE, the parties agree as follows:
1. Terms and Conditions of Engagement.
----------------------------------
(a) Independent Contractor. The Company hereby enters into an
----------------------
arrangement with the Consultant as independent contractor and the Consultant
accepts such arrangement with the Company in such capacity subject to the terms
and conditions hereof. The Consultant shall report to the Board of Directors of
the Company (the "Board of Directors") and shall have such authority and
responsibilities and perform such duties as shall be assigned to the Consultant
from time to time by the Board of Directors. All services to be performed by
the Consultant hereunder shall be performed on behalf of the Consultant
exclusively by Michel Berty, the President of the Consultant, and Consultant
shall make Michel Berty available therefor. The Consultant agrees to cause
Michel Berty to serve and Michel Berty agrees to serve, without additional
compensation, in such of the following positions as to which he is elected:
Chairman of the Board of Directors, member of the Board of Directors, member of
the board of directors of one or more entities directly or indirectly controlled
by or under common control with the Company (an "Affiliate"). Michel Berty is
not being employed as an employee of the Company hereunder.
(b) Exclusivity. Throughout the term of the Consultant's engagement
-----------
hereunder, the Consultant shall devote the time necessary to perform the
Consultant's duties. The Company shall not require the full-time services of
the Consultant. However, the Consultant shall devote at least on average one
eight hour day per week to the performance of his duties.
2. Compensation.
------------
(a) Consulting Fees. In consideration for the Consultant's services
---------------
hereunder, the Company shall pay to the Consultant a monthly consulting fee in
the amount of $20,000 for the Term of this Agreement.
<PAGE>
(b) Expenses. The Consultant shall be entitled to be reimbursed in
--------
accordance with the policies of the Company, as adopted and amended from time to
time, for all reasonable and necessary expenses incurred by the Consultant in
connection with the performance of the Consultant's duties hereunder upon
submission of verification of the nature and amount of such expenses in
accordance with the reimbursement policies from time to time adopted by the
Company.
3. Term, Termination and Termination Payments.
------------------------------------------
(a) Term. The term of this Agreement (the "Term") shall commence as
----
of the Effective Date of this Agreement and shall expire on the third
anniversary of the Effective Date. The term shall automatically renew for an
additional year at the end of each expiring term, unless either the Consultant
or the Company gives notice of termination before ninety (90) days prior to the
expiration of the then current Term.
(b) Termination. This Agreement and the Consultant's engagement
-----------
with the Company hereunder may only be terminated prior to the end of the Term:
(i) by mutual agreement of the Consultant and the Company;
(ii) by the Company without Cause; or
(iii) by the Company for Cause.
Notice of termination by either the Company or the Consultant shall be given in
writing and shall specify the basis for termination and the effective date of
termination. This Agreement shall also terminate immediately upon the death or
the Disability of Michel Berty.
For purposes of this Agreement, "Cause" means (w) any willful failure
by the Consultant in the performance of any of its duties pursuant to this
Agreement or breach by the Consultant or Michel Berty of any of the terms of
this Agreement; (x) the Consultant's or Michel Berty's conviction of any crime
(felony level, or penalized by incarceration or lesser crime involving moral
turpitude), or any act involving money or other property involving the Company
which would constitute a felony in the jurisdiction involved; or (y) any act by
the Consultant or Michel Berty of fraud, misappropriation, dishonesty,
embezzlement, or similar conduct against the Company or a customer of the
Company. The determination of the existence of "Cause" will be made in good
faith by the Board of Directors.
For purposes of this Agreement, "Disability" means the first to occur
of: (i) a disability of Michel Berty within the meaning of Section 72(m)(7) of
the Internal Revenue Code; that is, Michel Berty is unable to engage in any
substantial gainful activity with the Company or any other employer, by reason
of any medically determinable physical or mental impairment which can be
expected to result in death or to be of long continued and indefinite duration;
or (ii) a three-month period during which, due to accident, or illness, or any
other physical or mental incapacity, Michel Berty cannot perform his duties and
obligations hereunder.
-2-
<PAGE>
(c) Effect of Termination. Upon termination of this Agreement and
---------------------
the Consultant's engagement hereunder, the Company shall have no further
obligation to the Consultant, Michel Berty, or Michel Berty's estate with
respect to this Agreement, except for payment of consulting fees, if any,
accrued pursuant to Section 2(a) hereof and unpaid at the Termination Date, and
termination payments, if any, set forth in Section 3(e) hereof, as applicable,
subject to the provisions of Section 8 hereof. Nothing contained herein shall
limit or impinge any other rights or remedies of the Company, the Consultant, or
Michel Berty under any other agreement or plan to which the Consultant or Michel
Berty is a party or of which the Consultant or Michel Berty is a beneficiary.
(d) Survival. The covenants of the Consultant and Michel Berty in
--------
Sections 4, 5, 6, and 7 hereof shall survive the termination of this Agreement
and the Consultant's engagement hereunder and shall not be extinguished thereby.
(e) Termination Without Cause. Upon termination of the Consultant's
-------------------------
engagement by the Company without Cause under Section 3(b)(ii) hereof, the
Company shall be obligated to continue to pay the Consultant its monthly fee of
$20,000 for the remaining Term of this Agreement or until one (1) year after
such termination (whichever occurs first).
4. Agreement Not to Compete and Not to Solicit Customers.
-----------------------------------------------------
(a) Agreement Not to Compete. The Consultant and Michel Berty agree
------------------------
that commencing on the Effective Date and continuing through the Consultant's
engagement hereunder and for two (2) years after the termination of this
Agreement (the "Applicable Period"), they will not (except (i) for Berty's
service as a director and/or consultant of the companies listed on Exhibit A, or
(ii) on behalf of or with the prior written consent of the Company, which
consent may be withheld in Company's sole discretion), within the world (the
"Area"), either directly or indirectly, on the Consultant's or Michel Berty's
own behalf, or on behalf of others, engage in, as a director, officer,
principal, partner, consultant or executive or managerial employee, or provide
any of the same type of services performed on behalf of the Company, to any
Competing Business or own a controlling beneficial interest in a Competing
Business. For purposes of this Section 4, the Consultant and Michel Berty
acknowledge and agree that the Business of the Company is conducted in the Area.
"Competing Business" means any person, firm, corporation, joint
venture or other business entity which is engaged in the design, production,
marketing, distribution, or provision of software engineering/reengineering of
Year 2000 Compliance Products and Services (the "Business of the Company") (or
any aspect thereof) within the Area.
-3-
<PAGE>
"Year 2000 Compliance Products and Services" means software tools,
methodologies, processes and associated services (including without limitation,
program management, analysis, assessment, conversion, testing, quality
assurance, and configuration management) relating to computer software problems
and issues associated with the year 2000.
(b) Agreement Not to Solicit Customers. The Consultant and Michel
----------------------------------
Berty agree that commencing on the Effective Date and continuing through the
Applicable Period, they will not, either directly or indirectly, on the
Consultant's own behalf or in the service of or on behalf of others, solicit or
divert, or attempt to solicit or divert, to a Competing Business, any individual
or entity (i) which is a client or customer of the Company or an Affiliate, (ii)
as to which, to the knowledge of Consultant or Berty, the Company or an
Affiliate is in the process of making a proposal or negotiating for a customer
or client relationship or is discussing or conducting a "pilot", or (iii) with
whom the Company or an Affiliate jointly provides services or products through
alliances or joint ventures to a client or customer during the term of the
Consultant's engagement with the Company.
5. Agreement Not to Solicit Employees.
----------------------------------
The Consultant and Michel Berty agree that commencing on the Effective
Date and continuing through the Applicable Period, they will not, either
directly or indirectly, on the Consultant's or Michel Berty's own behalf or in
the service of or on behalf of others, solicit, divert or hire away, or attempt
to solicit, divert or hire away, to any Competing Business in the Area any
person employed by the Company or an Affiliate, whether or not such employee is
a full-time employee or a temporary employee of the Company or an Affiliate and
whether or not such employment is pursuant to written agreement and whether or
not such employment is for a determined period or is at will.
6. Ownership and Protection of Confidential Information and Trade Secrets.
----------------------------------------------------------------------
(a) Definitions. "Confidential Information" means data and
-----------
information relating to the business of the Company or an Affiliate (which does
not rise to the status of a Trade Secret) which is or has been disclosed to the
Consultant by the Company or an Affiliate or of which the Consultant became
aware as a consequence of or through his relationship to the Company and which
has value to the Company and is not generally known to its competitors.
Confidential Information shall not include any data or information that has been
voluntarily disclosed to the public by the Company (except where such public
disclosure has been made by the Consultant without authorization) or that has
been independently developed and disclosed by others, or that otherwise enters
the public domain through lawful means.
"Trade Secrets" means information, including a formula, pattern,
compilation, program, device, method, technique, or process that: (i) derives
independent economic value, actual or potential, from not being generally known
to, and not being readily ascertainable by proper means by, other persons who
can obtain economic value from its disclosure or use, and (ii) is the subject of
efforts that are reasonable under the circumstances to maintain its secrecy.
-4-
<PAGE>
(b) Confidentiality. All Confidential Information and Trade Secrets
---------------
and all physical embodiments thereof received or developed by the Consultant
while engaged by the Company or an Affiliate are confidential to and are and
will remain the sole and exclusive property of the Company or Affiliate. Except
to the extent necessary to perform the duties assigned by the Company or an
Affiliate, the Consultant and Michel Berty will hold such Confidential
Information and Trade Secrets in trust and strictest confidence, and will not
use, reproduce, distribute, disclose or otherwise disseminate the Confidential
Information and Trade Secrets or any physical embodiments thereof and may in no
event take any action causing or fail to take the action necessary in order to
prevent, any Confidential Information and Trade Secrets disclosed to or
developed by the Consultant to lose its character or cease to qualify as
Confidential Information or Trade Secrets.
(c) Return of Company Property. Upon request by the Company or an
--------------------------
Affiliate, and in any event upon termination of the engagement of the Consultant
with the Company or an Affiliate for any reason, as a prior condition to
receiving any final fees hereunder (including any payments pursuant to Section
3(e) hereof), the Consultant will promptly deliver to the Company or an
Affiliate all property belonging to the Company or an Affiliate, including,
without limitation, all Confidential Information and Trade Secrets (and all
embodiments thereof) then in the Consultant's or Michel Berty's custody, control
or possession.
(d) Survival. The covenants of confidentiality set forth herein will
--------
apply on and after the date hereof to any Confidential Information and Trade
Secrets disclosed by the Company or an Affiliate, or developed by the Consultant
prior to or after the date hereof. The covenants restricting the use of
Confidential Information will continue and be maintained by the Consultant for a
period of two years following the termination of this Agreement. The covenants
restricting the use of Trade Secrets will continue and be maintained by the
Consultant following termination of this Agreement for so long as permitted by
the Maryland Uniform Trade Secrets Act.
7. Remedies.
--------
The Consultant and Michel Berty agree that the covenants and agreements
contained in Sections 4, 5, and 6 hereof are of the essence of this Agreement;
that each of such covenants is reasonable and necessary to protect and preserve
the interests and properties of the Company and the Business of the Company;
that the Company is engaged in and throughout the Area in the Business of the
Company; that irreparable loss and damage will be suffered by the Company should
the Consultant or Michel Berty breach any of such covenants and agreements; that
each of such covenants and agreements is separate, distinct and severable not
only from the other of such covenants and agreements but also from the other and
remaining provisions of this Agreement; that the unenforceability of any such
covenant or agreement shall not affect the validity or enforceability of any
other such covenant or agreements or any other provision or provisions of this
Agreement; and that, in addition to other remedies available to it, the Company
shall be entitled to specific performance of this Agreement and to both
temporary and permanent injunctions to prevent a breach or contemplated breach
by the Consultant or Michel Berty of any of such covenants or agreements.
-5-
<PAGE>
8. No Set-Off.
----------
The existence of any claim, demand, action or cause of action by the
Consultant or Michel Berty against the Company, or any Affiliate of the Company,
whether predicated upon this Agreement or otherwise, shall not constitute a
defense to the enforcement by the Company of any of its rights hereunder. The
existence of any claim, demand, action or cause of action by the Company against
the Consultant or Michel Berty, whether predicated upon this Agreement or
otherwise, shall not constitute a defense to the enforcement by the Consultant
of any of its rights hereunder; provided, however, that the Company shall have
the right to discontinue payments to the Consultant under Section 3(e) hereof,
as applicable, if the Consultant or Michel Berty should breach any of their
obligations under Sections 4, 5, or 6 hereof and the Company notifies the
Consultant of that breach.
9. Notice.
------
All notices, requests, demands and other communications required
hereunder shall be in writing and shall be deemed to have been duly given if
delivered or if mailed, by United States certified or registered mail, prepaid
to the party to which the same is directed at the following addresses (or at
such other addresses as shall be given in writing by the parties to one
another):
If to the Company: ZMAX CORPORATION
20251 Century Boulevard
Germantown, Maryland 20874
Attn: Michael C. Higgins, President
Fax: 301-353-9501
If to the Consultant: MBY Consultant, Inc.
40 Sayre's Path
P. O. Box 466
Wainscott, New York 11975
Attn: Michel Berty, President
Fax: 516-537-4509
If to Michel Berty: Michel Berty
40 Sayre's Path
P. O. Box 466
Wainscott, New York 11975
Fax: 516-537-4509
Notices delivered in person shall be effective on the date of delivery. Notices
delivered by mail as aforesaid shall be effective upon the third calendar day
subsequent to the postmark date hereof.
-6-
<PAGE>
10. Miscellaneous.
-------------
(a) Assignment. Neither this Agreement nor any right of the parties
----------
hereunder may be assigned or delegated by any party hereto without the prior
written consent of the other party.
(b) Waiver. The waiver by the Company of any breach of this
------
Agreement by the Consultant shall not be effective unless in writing, and no
such waiver shall constitute the waiver of the same or another breach on a
subsequent occasion.
(c) Governing Law and Choice of Forum. This Agreement shall be
---------------------------------
governed by and construed in accordance with the internal laws of the State of
Maryland. The parties agree that any appropriate state or federal court located
in Maryland shall have exclusive jurisdiction of any case or controversy arising
under or in connection with this Agreement and shall be a proper forum in which
to adjudicate such case or controversy. The parties expressly consent to
personal jurisdiction and venue in such courts.
(d) Entire Agreement/Amendment. This Agreement embodies the entire
--------------------------
agreement of the parties hereto relating to the subject matter hereof and
supersedes all oral agreements, and to the extent inconsistent with the terms
hereof, all other written agreements. This Agreement may not be modified,
amended, supplemented or terminated except by a written instrument executed by
the parties hereto.
(e) Severability. Each of the covenants and agreements hereinabove
------------
contained shall be deemed separate, severable and independent covenants, and in
the event that any covenant shall be declared invalid by any court of competent
jurisdiction, such invalidity shall not in any manner affect or impair the
validity or enforceability of any other part or provision of such covenant or of
any other covenant contained herein.
(f) Captions and Section Headings. Captions and section headings
-----------------------------
used herein are for convenience only and are not a part of this Agreement and
shall not be used in construing it.
(g) Arbitration. Except as provided in Section 7, any dispute
-----------
arising under this Agreement shall be submitted to a single arbitrator selected
by the American Arbitration Association whose rules of arbitration and
conciliation shall apply. The American Arbitration Association shall select an
arbitrator experienced in computer consulting.
[INTENTIONALLY BLANK]
-7-
<PAGE>
IN WITNESS WHEREOF, the Company, the Consultant, and Michel Berty have
each executed and delivered this Agreement as of the date first shown above.
COMPANY:
ZMAX Corporation
/s/ Michael C. Higgins
By: Michael C. Higgins
----------------------------
Title: President
-------------------------
[CORPORATE SEAL]
CONSULTANT:
MBY, Inc.
/s/ Michel Berty
-------------------------------
By: Michel Berty
Title: President
-------------------------
[CORPORATE SEAL]
MICHEL BERTY:
By: /s/ Michel Berty
----------------------------
Michel Berty
-8-
<PAGE>
EXHIBIT "A"
to
CONSULTING AGREEMENT
MICHEL BERTY, DIRECTOR AND CONSULTING RELATIONSHIPS
DIRECTOR:
COMPUTRON Application Software
INTERSOLV Client/Server Supplier
MASTECH American and Offshore Service Company
SAPIENS Rapid Application Development Provider
CONSULTANT:
CAP GEMINI GROUP Consultant to the President of Directoire
P.A.C. U.S. Representative of this French
Consulting Company specialized in market
surveys in Europe.
00573615.W51
<PAGE>
Exhibit 10.10
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT (this "Agreement") is made on May 30, 1997,
between ZMAX CORPORATION, a Nevada corporation (the "Company"), and WAREHAM
MANAGEMENT LTD., a company organized under the laws of British Columbia, Canada
(the "Consultant").
AGREEMENT
In consideration of the above and the retention of the Consultant by the
Company, and the mutual agreements hereinafter set forth, the parties agree as
follows:
1. Engagement as a Consultant. The Company hereby retains the
--------------------------
Consultant, and the Consultant hereby accepts such engagement by the Company,
upon the terms and conditions of this Agreement.
2. Duties. The Consultant is engaged to be available on a reasonable,
------
on-call basis to provide consulting services related to accounting and financial
matters of the Company, as described in Exhibit A the ("Services"). The
---------
Consultant agrees to perform and discharge well and faithfully all Services as
the Company reasonably may request from time to time. The Consultant will hold
in trust for the Company all funds and property it receives on behalf of the
Company, and will account for and remit all such funds to the Company, as
applicable. The Consultant will report to the Board of Directors of the
Company. Unless otherwise agreed to by the Company, all Services to be
performed by the Consultant hereunder will be performed on behalf of the
Consultant exclusively by Mr. G.W. Norman Wareham, the President of the
Consultant, and Consultant will make Mr. Wareham available therefor. The
Consultant agrees to cause Mr. Wareham to serve, and Mr. Wareham agrees to
serve, without additional compensation, in the corporate positions to which he
may be elected or appointed by which the Company or its Board of Directors,
which the parties agree will not establish an employment relationship between
the Company and Mr. Wareham. Throughout the term of the Consultant's engagement
hereunder, the Consultant will devote the time necessary to perform the Services
but will not be required to devote its services on a full-time or exclusive
basis, so long as Consultant is performing its assigned or requested duties
under this Agreement.
3. Compensation. As compensation for the Services, the Company will pay
------------
to the Consultant the amount of U.S. $3,500.00 per month plus seven percent (7%)
to cover Canadian General Sales Tax (the "Consulting Fee"), payable on the first
business day of each month. The Consultant will receive no compensation in
addition to that set forth in this Agreement for any Services rendered to the
Company unless otherwise agreed to by the Company.
4. Reimbursement of Expenses. The Consultant will be entitled to be
-------------------------
reimbursed in accordance with the policies of the Company, as adopted and
amended from time to time, for
<PAGE>
all reasonable and necessary expenses incurred by him in connection with the
performance of Services pursuant to this Agreement; provided that the Consultant
will, as a condition of such reimbursement, submit acceptable verification of
the nature and amount of such expenses in accordance with the reimbursement
policies from time to time adopted by the Company.
5. Term and Termination. The term of the engagement of the Consultant by
--------------------
the Company will commence on the date of this Agreement and will continue for
one (1) year thereafter (the "Term"), unless sooner terminated as provided
herein. At the end of each expiring Term, the Term shall automatically renew
for an additional year, unless either the Consultant or the Company gives notice
of termination. The Company or the Consultant may terminate this Agreement with
or without cause on thirty (30) days notice to the other. Upon the termination
of the Consultant's engagement hereunder, the Company will have no further
obligation to the Consultant, except that the Company will pay to the Consultant
any compensation and reimbursement accrued up to the date of termination
hereunder and unpaid on such date of termination.
6. Agreement Not to Compete or Solicit Customers.
---------------------------------------------
(a) Agreement Not to Compete. The parties agree that, commencing on
------------------------
the effective date of this Agreement and continuing through the Consultant's
engagement hereunder and for two (2) years after the termination of this
Agreement (the "Applicable Period"), neither the Consultant nor Mr. Wareham will
(except on behalf of or with the prior written consent of the Company, which
consent may be withheld in Company's sole discretion), either directly or
indirectly, on the Consultant's or Mr. Wareham's behalf, or on behalf of others,
(i) engage in (as a director, officer, principal, partner, consultant or
executive or managerial employee) or provide any of the same type of services
performed on behalf of the Company to any Competing Business or (ii) own a
controlling beneficial interest in a Competing Business. For purposes of this
Section, the Consultant and Mr. Wareham acknowledge and agree that the Business
of the Company (as defined below) is conducted worldwide. "Competing Business"
means any person, firm, corporation, joint venture or other business entity that
is engaged in any aspect of the design, production, marketing, distribution, or
provision of software engineering/reengineering of Year 2000 Compliance Products
and Services (the "Business of the Company") within the Area. "Year 2000
Compliance Products and Services" means software tools, methodologies, processes
and associated services (including without limitation, program management,
analysis, assessment, conversion, testing, quality assurance, and configuration
management) relating to computer software problems and issues associated with
the year 2000.
(b) Agreement Not to Solicit Customers. The Consultant and Mr.
----------------------------------
Wareham agree that during the Applicable Period, they will not, either directly
or indirectly, on the Consultant's or Mr. Wareham's behalf or in the service of
or on behalf of others, solicit or divert, or attempt to solicit or divert, to a
Competing Business, any individual or entity (i) that is a client or customer of
the Company or an Affiliate, (ii) as to which, to the knowledge of Consultant or
Mr. Wareham, the Company or an Affiliate is in the process of making a proposal
or negotiating for a customer or client relationship or is discussing or
conducting a "pilot", or
-2-
<PAGE>
(iii) with whom the Company or an Affiliate jointly provides services or
products through alliances or joint ventures to a client or customer during the
term of the Consultant's engagement with the Company. "Affiliate" means any
entity that directly or indirectly controls, is controlled by, or is under
common control with the Company.
7. Agreement Not to Solicit Employees. The Consultant and Mr. Wareham
----------------------------------
agree that during the Applicable Period, they will not, either directly or
indirectly, on the Consultant's or Mr. Wareham's own behalf or in the service of
or on behalf of others, solicit, divert or hire away, or attempt to solicit,
divert or hire away, to any Competing Business any person employed by the
Company or an Affiliate, whether or not such employee is a full-time or
temporary employee of the Company or an Affiliate and whether or not such
employment is pursuant to written agreement, for a determined period or at will,
or any consultant or contractor of the Company or an Affiliate.
8. Ownership and Protection of Confidential Information and Trade Secrets.
----------------------------------------------------------------------
(a) Definitions. "Confidential Information" means data and
-----------
information relating to the business of the Company or an Affiliate (which does
not rise to the status of a Trade Secret) that is or has been disclosed to the
Consultant by the Company or an Affiliate or of which the Consultant became
aware as a consequence of or through its relationship to the Company, which has
value to the Company and is not generally known to its competitors.
Confidential Information will not include any data or information that has been
voluntarily disclosed to the public by the Company (except where such public
disclosure has been made by the Consultant without authorization) or that has
been independently developed and disclosed by others, or that otherwise enters
the public domain through lawful means. "Trade Secrets" means information,
including a formula, pattern, compilation, program, device, method, technique,
or process that: (i) derives independent economic value, actual or potential,
from not being generally known to, and not being readily ascertainable by proper
means by, other persons who can obtain economic value from its disclosure or
use, and (ii) is the subject of efforts that are reasonable under the
circumstances to maintain its secrecy.
(b) Confidentiality. All Confidential Information and Trade Secrets
---------------
and all physical embodiments thereof received or developed by the Consultant
while engaged by the Company or an Affiliate are confidential to and are and
will remain the sole and exclusive property of the Company or Affiliate. Except
to the extent necessary to perform the duties assigned by the Company or an
Affiliate, the Consultant and Mr. Wareham will hold such Confidential
Information and Trade Secrets in trust and strictest confidence, and will not
use, reproduce, distribute, disclose or otherwise disseminate the Confidential
Information and Trade Secrets or any physical embodiments thereof and may in no
event take any action causing or fail to take the action necessary in order to
prevent, any Confidential Information and Trade Secrets disclosed to or
developed by the Consultant to lose its character or cease to qualify as
Confidential Information or Trade Secrets.
-3-
<PAGE>
(c) Return of Company Property. Upon request by the Company or an
--------------------------
Affiliate, and in any event upon termination of the engagement of the Consultant
with the Company or an Affiliate for any reason, as a prior condition to
receiving any final fees or reimbursement hereunder (including any payments
pursuant to Section 3 hereof), the Consultant will promptly deliver to the
Company or an Affiliate all property belonging to the Company or an Affiliate,
including, without limitation, all Confidential Information and Trade Secrets
(and all embodiments thereof) then in the Consultant's or Mr. Wareham's custody,
control or possession.
(d) Survival. The covenants of confidentiality set forth herein will
--------
apply on and after the date hereof to any Confidential Information and Trade
Secrets disclosed by the Company or an Affiliate, or developed by the Consultant
prior to or after the date hereof. The covenants restricting the use of
Confidential Information will continue and be maintained by the Consultant for a
period of two (2) years following the termination of this Agreement. The
covenants restricting the use of Trade Secrets will continue and be maintained
by the Consultant following termination of this Agreement for so long as
permitted by the Maryland Uniform Trade Secrets Act.
9. Remedies. The Consultant and Mr. Wareham agree that the covenants and
--------
agreements contained in Sections 6, 7, and 8 hereof are of the essence of this
Agreement; that each of such covenants is reasonable and necessary to protect
and preserve the interests and properties of the Company and the Business of the
Company; that the Company is engaged in the Business of the Company worldwide;
that irreparable loss and damage will be suffered by the Company should the
Consultant or Mr. Wareham breach any of such covenants and agreements; that each
of such covenants and agreements is separate, distinct and severable not only
from the other of such covenants and agreements but also from the other and
remaining provisions of this Agreement; that the unenforceability of any such
covenant or agreement will not affect the validity or enforceability of any
other such covenant or agreements or any other provision or provisions of this
Agreement; and that, in addition to other remedies available to it, the Company
will be entitled to specific performance of this Agreement and to both temporary
and permanent injunctions to prevent a breach or contemplated breach by the
Consultant or Mr. Wareham of any of such covenants or agreements.
10. No Set-Off. The existence of any claim, demand, action or cause of
----------
action by the Consultant or Mr. Wareham against the Company or any Affiliate,
whether predicated upon this Agreement or otherwise, will not constitute a
defense to the enforcement by the Company of any of its rights hereunder. The
existence of any claim, demand, action or cause of action by the Company against
the Consultant or Mr. Wareham, whether predicated upon this Agreement or
otherwise, will not constitute a defense to the enforcement by the Consultant of
any of its rights hereunder; provided, however, that the Company will have the
right to discontinue payments to the Consultant under Section 3(e) hereof, as
applicable, if the Consultant or Mr. Wareham should breach any of their
obligations under Sections 6, 7, or 8 hereof and the Company notifies the
Consultant of that breach.
-4-
<PAGE>
11. Notice. All notices, requests, demands and other communications
------
required or permitted hereunder must be in writing and deemed given and
effective when personally delivered or sent by facsimile with confirmation of
receipt or when deposited in the mail with postage prepaid to the party to which
the same is directed at the following addresses (or at such other addresses as
will be given in writing by the parties to one another):
To the Company: ZMAX CORPORATION
20251 Century Boulevard
Germantown, Maryland 20874
Attn: Michael C. Higgins, President
Fax: 301-353-9501
To the Consultant: WAREHAM MANAGEMENT LTD.
1015 Kennedy Avenue
North Vancouver, British Columbia
CANADA V7R 1L6
Attn: G.W. Norman Wareham
Fax: 604-687-6755
To Mr. Wareham: Mr. G.W. Norman Wareham
1015 Kennedy Avenue
North Vancouver, British Columbia
CANADA V7R 1L6
Fax: 604-687-6755
12. Miscellaneous.
-------------
(a) Assignment. Neither the Consultant nor Mr. Wareham may assign any
----------
rights or delegate any duties it has assumed hereunder without the prior written
consent of the other party. This Agreement is personal to the Consultant.
(b) Waiver. A party's waiver of any breach of this Agreement by
------
another party will not be effective unless in writing, and no such waiver will
constitute the waiver of the same or another breach on a subsequent occasion.
-5-
<PAGE>
(c) Consultant as Independent Contractor. The Consultant and Mr.
------------------------------------
Wareham will act as an independent contractor in performing the Services and
will not hold itself or himself out as an employee or agent of the Company.
Neither the Consultant or Mr. Wareham has the authority to bind the Company by
virtue of this Agreement without the Company's express prior consent.
(d) Governing Law and Choice of Forum. This Agreement will be
---------------------------------
governed by and construed in accordance with the internal laws of the State of
Maryland. The parties agree that any appropriate state or federal court located
in Maryland will have exclusive jurisdiction of any case or controversy arising
under or in connection with this Agreement and will be a proper forum in which
to adjudicate such case or controversy. The parties expressly consent to
personal jurisdiction and venue in such courts.
(e) Entire Agreement/Amendment. This Agreement embodies the entire
--------------------------
agreement of the parties hereto relating to the subject matter hereof and
supersedes all oral agreements, and to the extent inconsistent with the terms
hereof, all other written agreements. This Agreement may not be modified,
amended, supplemented or terminated except by a written instrument executed by
all parties hereto.
(f) Severability. Each of the covenants and agreements hereinabove
------------
contained will be deemed separate, severable and independent covenants, and in
the event that any covenant will be declared invalid by any court of competent
jurisdiction, such invalidity will not in any manner affect or impair the
validity or enforceability of any other part or provision of such covenant or of
any other covenant contained herein.
(g) Captions and Section Headings. Captions and section headings used
-----------------------------
herein are for convenience only and are not a part of this Agreement and will
not be used in construing it.
(h) Arbitration. Except as otherwise provided herein, any dispute
-----------
arising under this Agreement will be submitted to a single arbitrator selected
by the American Arbitration Association whose rules of arbitration and
conciliation will apply. The American Arbitration Association will select an
arbitrator experienced in computer consulting.
-6-
<PAGE>
EXECUTED AS OF MAY ___, 1997.
ZMAX CORPORATION
By: /s/Michael C. Higgins
------------------------------
Michael C. Higgins
President
WAREHAM MANAGEMENT LTD.
By: /s/G.W. Norman Wareham
------------------------------
G.W. Norman Wareham
President
/s/G.W. Norman Wareham
------------------------------------
G.W. Norman Wareham
-7-
<PAGE>
EXHIBIT A
---------
DUTIES OF CONSULTANT
The duties of the Consultant will be as follows:
(a) Act as liaison between investors of and attorneys for the company.
(b) Prepare bank documents, including wire transfers.
(c) Maintain U.S. and Canadian financial records for Company.
(d) Assist auditors of the company with financial statements and audit.
(e) Maintain and update the Company's financial records.
(f) Prepare interim financial statements and reports.
(g) Set up accounts with The Depository Trust Company and the Canadian
Depository Trust to track the brokerage and individual transaction of
trading in the Company's stock.
(h) Review reports from Depository Trust and Canadian Depository Trust and
disseminate internally.
(i) Such other acts as the Company's management or Board of Directors may
request from time to time.
<PAGE>
Exhibit 10.11
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT (this "Agreement") is made on May 30, 1997,
between ZMAX CORPORATION, a Nevada corporation (the "Company"), and SHAFIQ
NAZERALI, a resident of Vancouver, British Columbia, Canada (the "Consultant").
AGREEMENT
In consideration and the retention of the Consultant by the Company, and
the mutual agreements hereinafter set forth, the parties agree as follows:
1. Engagement as a Consultant. The Company hereby retains the
--------------------------
Consultant, and the Consultant hereby accepts such engagement by the Company,
upon the terms and conditions of this Agreement.
2. Duties. The Company engages the Consultant to be available on a
------
reasonable, on-call basis to provide consulting services related to raising
capital, business development and strategic opportunities, for the Company, as
described in Exhibit A (the "Services"). The Consultant agrees to perform and
---------
discharge well and faithfully all Services as the Company reasonably may request
of him from time to time. The Consultant will report to the Board of Directors
of the Company. Throughout the term of the Consultant's engagement hereunder,
the Consultant will devote the time necessary to perform the Services but will
not be required to devote his services on a full-time basis, so long as, in the
opinion of the Board of Directors, he is fulfilling his duties under this
Agreement. The Consultant will hold in trust for the Company all funds and
property he receives on behalf of the Company, and he will account for and remit
all such funds to the Company, as applicable.
3. Compensation. As compensation for the Services, the Company will pay
------------
to the Consultant the amount of U.S. $10,000 per month (the "Consulting Fee"),
payable on the first business day of each month. The Consultant will receive no
compensation in addition to that set forth in this Agreement for any Services
rendered by him to the Company unless otherwise agreed to by the Company.
4. Reimbursement of Expenses. The Consultant will be entitled to be
-------------------------
reimbursed in accordance with the policies of the Company, as adopted and
amended from time to time, for all reasonable and necessary expenses incurred by
him in connection with the performance of the Services pursuant to this
Agreement; provided that the Consultant will, as a condition of such
reimbursement, submit acceptable verification of the nature and amount of such
expenses in accordance with the reimbursement policies from time to time adopted
by the Company.
5. Term and Termination. The term of the engagement of the Consultant by
--------------------
the Company will commence on the date of this Agreement and will continue for
one (1) year
<PAGE>
thereafter (the "Term"), unless sooner terminated as provided herein. At the
end of each expiring Term, the Term shall automatically renew for an additional
year, unless either the Consultant or the Company gives notice of termination.
The Company or the Consultant may terminate this Agreement with or without cause
on thirty (30) days notice to the other. Upon the termination of the
Consultant's engagement hereunder, the Company will have no further obligation
to the Consultant, except that the Company will pay to the Consultant any
compensation and reimbursement accrued up to the date of termination hereunder
and unpaid on such date of termination.
6. Agreement Not to Compete or Solicit Customers.
---------------------------------------------
(a) Agreement Not to Compete. The parties agree that, commencing on
------------------------
the effective date of this Agreement and continuing through the Consultant's
engagement hereunder and for two (2) years after the termination of this
Agreement (the "Applicable Period"), the Consultant will not (except on behalf
of or with the prior written consent of the Company, which consent may be
withheld in Company's sole discretion), either directly or indirectly, on his or
another's behalf, (i) engage in (as a director, officer, principal, partner,
consultant or executive or managerial employee) or provide any of the same type
of services performed on behalf of the Company to any Competing Business or (ii)
own a controlling beneficial interest in a Competing Business. For purposes of
this Section, the Consultant acknowledges and agrees that the Business of the
Company (as defined below) is conducted worldwide. "Competing Business" means
any person, firm, corporation, joint venture or other business entity that is
engaged in any aspect of the design, production, marketing, distribution, or
provision of software engineering/reengineering of Year 2000 Compliance Products
and Services (the "Business of the Company"). "Year 2000 Compliance Products
and Services" means software tools, methodologies, processes and associated
services (including without limitation, program management, analysis,
assessment, conversion, testing, quality assurance, and configuration
management) relating to computer software problems and issues associated with
the year 2000.
(b) Agreement Not to Solicit Customers. The Consultant agrees that
----------------------------------
during the Applicable Period, he will not, either directly or indirectly, on the
Consultant's own behalf or in the service of or on behalf of others, solicit or
divert, or attempt to solicit or divert, to a Competing Business, any individual
or entity (i) that is a client or customer of the Company or an Affiliate, (ii)
as to which, to the knowledge of Consultant, the Company or an Affiliate is in
the process of making a proposal or negotiating for a customer or client
relationship or is discussing or conducting a "pilot", or (iii) with whom the
Company or an Affiliate jointly provides services or products through alliances
or joint ventures to a client or customer during the term of the Consultant's
engagement with the Company. "Affiliate" means any entity that directly or
indirectly controls, is controlled by, or is under common control with the
Company.
7. Agreement Not to Solicit Employees. The Consultant agrees that during
----------------------------------
the Applicable Period, he will not, either directly or indirectly, on his own
behalf or in the service of or on behalf of others, solicit, divert or hire
away, or attempt to solicit, divert or hire away, to any Competing Business any
person employed by the Company or an Affiliate, whether or
2
<PAGE>
not such employee is a full-time or temporary employee of the Company or an
Affiliate and whether or not such employment is pursuant to written agreement,
for a determined period or at will.
8. Ownership and Protection of Confidential Information and Trade
--------------------------------------------------------------
Secrets.
- -------
(a) Definitions. "Confidential Information" means data and
-----------
information relating to the business of the Company or an Affiliate (which does
not rise to the status of a Trade Secret) that is or has been disclosed to the
Consultant by the Company or an Affiliate or of which the Consultant became
aware as a consequence of or through his relationship to the Company, which has
value to the Company and is not generally known to its competitors.
Confidential Information will not include any data or information that has been
voluntarily disclosed to the public by the Company (except where such public
disclosure has been made by the Consultant without authorization) or that has
been independently developed and disclosed by others, or that otherwise enters
the public domain through lawful means. "Trade Secrets" means information,
including a formula, pattern, compilation, program, device, method, technique,
or process that: (i) derives independent economic value, actual or potential,
from not being generally known to, and not being readily ascertainable by proper
means by, other persons who can obtain economic value from its disclosure or
use, and (ii) is the subject of efforts that are reasonable under the
circumstances to maintain its secrecy.
(b) Confidentiality. All Confidential Information and Trade Secrets
---------------
and all physical embodiments thereof received or developed by the Consultant
while engaged by the Company or an Affiliate are confidential to and are and
will remain the sole and exclusive property of the Company or Affiliate. Except
to the extent necessary to perform the duties assigned by the Company or an
Affiliate, the Consultant will hold such Confidential Information and Trade
Secrets in trust and strictest confidence, and will not use, reproduce,
distribute, disclose or otherwise disseminate the Confidential Information and
Trade Secrets or any physical embodiments thereof and may in no event take any
action causing or fail to take the action necessary in order to prevent, any
Confidential Information and Trade Secrets disclosed to or developed by the
Consultant to lose its character or cease to qualify as Confidential Information
or Trade Secrets.
(c) Return of Company Property. Upon request by the Company or an
--------------------------
Affiliate, and in any event upon termination of the engagement of the Consultant
with the Company or an Affiliate for any reason, as a prior condition to
receiving any final fees or reimbursement hereunder (including any payments
pursuant to Section 3 hereof), the Consultant will promptly deliver to the
Company or an Affiliate all property belonging to the Company or an Affiliate,
including, without limitation, all Confidential Information and Trade Secrets
(and all embodiments thereof) then in the Consultant's custody, control or
possession.
(d) Survival. The covenants of confidentiality set forth herein will
--------
apply on and after the date hereof to any Confidential Information and Trade
Secrets disclosed by the Company or an Affiliate, or developed by the Consultant
prior to or after the date hereof. The
-3-
<PAGE>
covenants restricting the use of Confidential Information will continue and be
maintained by the Consultant for a period of two (2) years following the
termination of this Agreement. The covenants restricting the use of Trade
Secrets will continue and be maintained by the Consultant following termination
of this Agreement for so long as permitted by the Maryland Uniform Trade Secrets
Act.
9. Remedies. The Consultant agrees that the covenants and agreements
--------
contained in Sections 6, 7 and 8 hereof are of the essence of this Agreement;
that each of such covenants is reasonable and necessary to protect and preserve
the interests and properties of the Company and the Business of the Company
worldwide; that the Company is engaged in the Business of the Company; that
irreparable loss and damage will be suffered by the Company should the
Consultant breach any of such covenants and agreements; that each of such
covenants and agreements is separate, distinct and severable not only from the
other of such covenants and agreements but also from the other and remaining
provisions of this Agreement; that the unenforceability of any such covenant or
agreement will not affect the validity or enforceability of any other such
covenant or agreements or any other provision or provisions of this Agreement;
and that, in addition to other remedies available to it, the Company will be
entitled to specific performance of this Agreement and to both temporary and
permanent injunctions to prevent a breach or contemplated breach by the
Consultant of any of such covenants or agreements.
10. No Set-Off. The existence of any claim, demand, action or cause of
----------
action by the Consultant against the Company or any Affiliate, whether
predicated upon this Agreement or otherwise, will not constitute a defense to
the enforcement by the Company of any of its rights hereunder. The existence of
any claim, demand, action or cause of action by the Company against the
Consultant, whether predicated upon this Agreement or otherwise, will not
constitute a defense to the enforcement by the Consultant of any of its rights
hereunder; provided, however, that the Company will have the right to
discontinue payments to the Consultant under Section 3 hereof, as applicable, if
the Consultant should breach any of its obligations under Sections 6, 7 or 8
hereof, and the Company notifies the Consultant of that breach.
11. Notice. All notices, requests, demands and other communications
------
required hereunder must be in writing and deemed govern and effective when
personally delivered, sent by fax with confirmation of receipt or when deposited
in the mail with postage prepaid to the party to which the same is directed at
the following addresses (or at such other addresses as will be given in writing
by the parties to one another):
To the Company: ZMAX CORPORATION
20251 Century Boulevard
Germantown, Maryland 20874
Attn: Michael C. Higgins, President
Fax: 301-353-9501
-4-
<PAGE>
To the Consultant: SHAFIQ NAZERALI
Suite 1819
1177 W. Hastings Street
Vancouver, British Columbia
CANADA V6E 2K3
Fax: 604-687-6755
12. Miscellaneous.
-------------
(a) Assignment. The Consultant may not assign any rights or delegate
----------
any duties it has assumed hereunder without the prior written consent of the
Company. This Agreement is personal to the Consultant.
(b) Waiver. A party's waiver of any breach of this Agreement by the
------
other will not be effective unless in writing, and no such waiver will
constitute the waiver of the same or another breach on a subsequent occasion.
(c) Consultant as Independent Contractor. The Consultant will act as
------------------------------------
an independent contractor in performing the Services and will not hold himself
out as an employee or agent of the Company. The Consultant has no authority to
bind the Company by virtue of this Agreement without the Company's express prior
consent.
(d) Governing Law and Choice of Forum. This Agreement will be
---------------------------------
governed by and construed in accordance with the internal laws of the State of
Maryland. The parties agree that any appropriate state or federal court located
in Maryland will have exclusive jurisdiction of any case or controversy arising
under or in connection with this Agreement and will be a proper forum in which
to adjudicate such case or controversy. The parties expressly consent to
personal jurisdiction and venue in such courts.
(e) Entire Agreement/Amendment. This Agreement embodies the entire
--------------------------
agreement of the parties hereto relating to the subject matter hereof and
supersedes all oral agreements, and to the extent inconsistent with the terms
hereof, all other written agreements. This Agreement may not be modified,
amended, supplemented or terminated except by a written instrument executed by
all parties hereto.
(f) Severability. Each of the covenants and agreements hereinabove
------------
contained will be deemed separate, severable and independent covenants, and in
the event that any covenant will be declared invalid by any court of competent
jurisdiction, such invalidity will not in any manner affect or impair the
validity or enforceability of any other part or provision of such covenant or of
any other covenant contained herein.
-5-
<PAGE>
(g) Captions and Section Headings. Captions and section headings used
-----------------------------
herein are for convenience only and are not a part of this Agreement and will
not be used in construing it.
(h) Arbitration. Except as otherwise provided herein, any dispute
-----------
arising under this Agreement will be submitted to a single arbitrator selected
by the American Arbitration Association whose rules of arbitration and
conciliation will apply. The American Arbitration Association will select an
arbitrator experienced in computer consulting.
EXECUTED AS OF May 30, 1997
ZMAX CORPORATION
By: /s/Michael C. Higgins
--------------------------------
Michael C. Higgins
President
/s/Shafiq Nazerali
------------------------------------
Shafiq Nazerali
-6-
<PAGE>
EXHIBIT A
---------
DUTIES OF CONSULTANT
The duties of the Consultant will be as follows:
(a) Arrange financing for the Company and its Affiliates, as requested by
the Board of Directors.
(b) Act as a liaison between the Company and the investment community and
brokers.
(c) Research and identify new business and strategic opportunities for the
Company.
(d) Consult with the Company's management and Board of Directors as
needed.
(e) Perform any other duties that management and the Board of Directors
may request from time to time.
<PAGE>
Exhibit 10.12
EARN OUT STOCK ESCROW AGREEMENT
THIS EARN OUT STOCK ESCROW AGREEMENT (this "Agreement") is made on
November 6, 1996, among ZMAX CORPORATION, a Nevada corporation ("ZMAX"); Michael
C. Higgins and Michael S. Cannon (collectively, the "Stockholders" and
individually, a "Stockholder"); and Powell, Goldstein, Frazer & Murphy ("Escrow
Agent").
BACKGROUND:
ZMAX and the Stockholders have agreed that ZMAX is acquiring all
outstanding capital stock, par value $1.00 (the "CSI Stock") of Century
Services, Inc., a Maryland corporation ("CSI") by the Corporation, pursuant to
the terms and conditions of the Stock Purchase Agreement dated the same date as
this Agreement, among ZMAX and the Stockholders (the "Acquisition Agreement").
The transactions contemplated by the Acquisition Agreement are referred to as
the "Transaction."
In accordance with the Acquisition Agreement, ZMAX will issue
3,200,000 shares of ZMAX common stock, par value $0.001 (the "ZMAX Stock") to
the Stockholders in exchange for their shares of CSI Stock.
2,800,000 of the 3,200,000 shares of ZMAX Stock (the "Earn Out Stock")
are subject to earn out on the terms and conditions set forth in the Acquisition
Agreement.
The parties have agreed to place the Earn Out Stock into escrow to be
released on the terms and conditions set forth in the Acquisition Agreement and
below.
In consideration of the mutual representations, warranties, covenants
and agreements contained in this Agreement, the parties agree as follows:
STATEMENT OF TERMS:
1. Definitions. All capitalized terms used in this Agreement and not
-----------
otherwise defined herein shall have the meanings assigned to such terms in the
Acquisition Agreement.
2. Appointment of Escrow Agent. ZMAX and the Stockholders appoint
---------------------------
Powell, Goldstein, Frazer & Murphy as Escrow Agent, and Escrow Agent agrees to
such appointment, all pursuant to the terms of this Agreement.
3. Delivery of Stock Certificates to Escrow Agent. ZMAX will deliver
----------------------------------------------
to Escrow Agent two stock certificates evidencing the issuance of 1,400,000
share of ZMAX Stock to each Stockholder. Escrow Agent will hold such stock
certificates in its vault and will release them only pursuant to the terms and
conditions of this Agreement.
<PAGE>
4. Procedures for Release of Stock.
-------------------------------
4.1 Receipt of Cash Flow Statement; Notice to Transfer Agent. During
--------------------------------------------------------
the term of this Agreement, upon receipt by Escrow Agent of either (i) a Cash
Flow Statement (as defined in the Acquisition Agreement) signed as approved by
ZMAX and each Stockholder pursuant to Section 1.5 or 1.6 of the Acquisition
Agreement or (ii) instructions jointly signed by ZMAX and the Stockholders or a
court or arbitration order as to the Cash Flow of CSI for a particular period,
Escrow Agent will deliver the ZMAX stock certificates held by it to ZMAX's
transfer agent ("Transfer Agent") and instruct Transfer Agent to replace each
stock certificate with (i) one new stock certificate evidencing the number of
shares of ZMAX Stock to be released to the Stockholder as described in the Cash
Flow Statement or other instructions and (ii) a second new stock certificate
evidencing the number of shares remaining, if any, after deducting the shares
being released as described in the Cash Flow Statement or other instructions,
which remaining shares will continue to be designated as Earn Out Stock and
remain subject to this Agreement. Escrow Agent will further instruct the
Transfer Agent to deliver the first new certificate to the Stockholder and the
second new certificate to Escrow Agent and to legend all stock certificates in
accordance with the Stockholders Agreement between ZMAX and the Stockholders;
provided, however, that until August 6, 1997, the first new certificate will be
delivered to ZMAX in accordance with the Stock Pledge and Security Agreement
between each Stockholder and ZMAX dated as of the date of this Agreement.
4.2 Notice of Termination of Earn Out. Upon receipt by Escrow Agent
---------------------------------
of a certificate from an executive officer of ZMAX or CSI certifying that a
Stockholder has been terminated by CSI for cause (as defined in the
Stockholder's employment agreement with CSI) or has violated his non-
competition, non-solicitation or proprietary information restrictions contained
in his employment agreement with CSI, Escrow Agent will promptly fax a copy of
the officer's certificate to the affected Stockholder. Unless, within 10
business days of Escrow Agent's sending such fax, Escrow Agent receives notice
from the Stockholder that he disputes the termination or breach of his
employment agreement, Escrow Agent will deliver to ZMAX the stock certificate of
the Stockholder held by Escrow Agent. If Escrow Agent receives a dispute notice
from the Stockholder, Escrow Agent will continue holding the stock certificate
of the Stockholder until it receives joint instructions from ZMAX and the
Stockholder or court or arbitration order.
4.3 Delivery Method. All documents and stock certificates delivered
---------------
under this Agreement will be delivered to the proper parties by Federal Express
or other recognized overnight courier service that provides receipt of delivery.
5. Notice of Accounting Firm. ZMAX will promptly notify Escrow Agent
-------------------------
if the independent accounting firm serving CSI is changed.
-2-
<PAGE>
6. Rights and Duties of Escrow Agent.
---------------------------------
6.1 Escrow Agent will not be liable for any actions taken or omitted
upon the advice of counsel or upon a reasonable interpretation of any
instructions or documents provided to it by ZMAX or the Stockholders that it
reasonably believes to be genuine or duly authorized. Escrow Agent may decline
to act if it is in doubt as to its duties under this Agreement and shall not be
liable for such failure to act. Notwithstanding references herein to the
Acquisition Agreement, Escrow Agent will not be charged with, nor be deemed to
have knowledge of, any terms or conditions thereof, and Escrow Agent will not be
under any duty to make any investigation of facts reported to it thereunder.
6.2 If Escrow Agent shall incur any liability, damage or expense
arising out of or resulting from any claim that Escrow Agent has improperly
distributed any of the Closing Documents under this Agreement, other than as a
result of Escrow Agent's gross negligence or willful misconduct, ZMAX and the
Stockholders (collectively, the "Indemnitor") shall indemnify and hold Escrow
Agent harmless therefrom. Escrow Agent is not responsible for the genuineness
of any signature and may rely conclusively upon, and shall be protected in
acting upon, any list, advice, judicial order or decree, certificate, notice,
request, consent, statement, instruction or other instrument believed by it in
good faith to be genuine or to be signed or presented by the proper party, or
duly authorized or properly made.
6.3 Escrow Agent is not responsible for any of the agreements
described herein except for the performance of its duties as expressly set forth
herein. Escrow Agent's duties and obligations hereunder will be governed solely
by the provisions of this Agreement, and Escrow Agent shall not have any duties
other than the duties expressly imposed herein and shall not be required to take
any action other than in accordance with the terms of this Agreement.
6.4 Escrow Agent will not be bound by any notice of, or demand with
respect to, any waiver, modification, amendment, termination, cancellation,
rescission or other action under or with respect to this Agreement, unless duly
executed by ZMAX and the Stockholders and, if Escrow Agent's rights or duties
are affected thereby, unless Escrow Agent has given its prior written consent
thereto.
6.5 In the event of any controversy or dispute hereunder, or with
respect to any question as to the construction of this Agreement, or any action
to be taken by Escrow Agent hereunder, Escrow Agent will incur no liability for
any action taken or omitted in good faith in accordance with the advice and the
opinion of its counsel or its own reasonable judgment. In the event of any
controversy or dispute hereunder, or with respect to any question as to the
construction of this Agreement, or any action to be taken by Escrow Agent
hereunder, Escrow Agent may request joint written instructions signed by ZMAX
and both Stockholders and/or may seek advice of counsel or commence an
interpleader action or seek any other appropriate relief from a court of
competent jurisdiction. ZMAX and the Stockholders each consent to jurisdiction
and venue in such court. If Escrow Agent deems it necessary to seek
-3-
<PAGE>
advise of counsel under this Section 6.5, ZMAX and the Stockholders will
reimburse Escrow Agent for the actual and reasonable costs of such counsel.
6.6 Escrow Agent's liability under this Agreement will be limited
solely to gross negligence or willful misconduct on its part.
6.7 The parties acknowledge that Escrow Agent is a law firm
currently representing ZMAX in the Transaction. ZMAX and the Stockholders agree
that this Agreement and the performance of the terms thereof by Escrow Agent
will not act in any manner to disqualify the law firm of Powell, Goldstein,
Frazer & Murphy from continuing its representation of ZMAX in the Transaction or
the contemplated engagement of Powell, Goldstein, Frazer & Murphy by CSI after
the Transaction is completed. ZMAX and the Stockholders, each having advice of
separate counsel, hereby waive conflict, if any, created by Escrow Agent
simultaneously serving as escrow agent under this Agreement any in such
representation of ZMAX and/or CSI. The parties further acknowledge that Escrow
Agent is entitled to reimbursement of its costs and expenses and the standard
hourly fees of attorneys in its firm that assist in performing the duties of
Escrow Agent under this Agreement, which amounts will be billed by Escrow Agent
to ZMAX.
7. Termination. This Agreement shall terminate upon the date on
-----------
which all Earn Out Shares have been delivered to the Stockholders.
8. Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the District of Columbia.
9. Assignment. This Agreement shall be binding upon and inure to the
----------
benefit of the parties hereto and their respective heirs, legal representatives,
successors and assigns.
10. No Third Party Beneficiaries. None of the provisions of this
----------------------------
Agreement is or shall be construed as for the benefit of or enforceable by any
person not a party to this Agreement.
11. Notice. Any notice required to be given hereunder shall be in
------
writing and either hand delivered or sent by Federal Express or other recognized
overnight courier service that provides receipt of delivery, simultaneously to
all parties at the addresses set forth below. Each party shall have the right
to change its address for the receipt of notices, upon the giving of proper
notice to all other parties hereto.
-4-
<PAGE>
If to ZMAX: ZMAX Corporation
Powell, Goldstein, Frazer & Murphy
1001 Pennsylvania Avenue, N.W.
Sixth Floor
Washington, D.C. 20004
Attention: Michael H. Chanin, Esq.
Phone: (202) 347-0066
Fax: (202) 624-7222
If to the Stockholders: Michael C. Higgins
12408 Rivers Edge Drive
Potomac, Maryland 20854
Phone: (301) 926-6771
And/Or (as applicable): Michael S. Cannon
46367 Hampshire Station
Sterling, Virginia 20165
Phone: (703) 404-2726
with a copy to: William J. Rowan, III, Esq.
Law Offices of Rowan and Quirk
27 Wood Lane
Rockville, Maryland 20850
Phone: (301) 762-4050
Fax: (301) 762-9189
If to Escrow Agent: Powell, Goldstein, Frazer & Murphy
1001 Pennsylvania Avenue, N.W.
Sixth Floor
Washington, D.C. 20004
Attention: Michael H. Chanin, Esq.
Phone: (202) 347-0066
Fax: (202) 624-7222
12. Entire Agreement. This Agreement constitutes the entire agreement
----------------
among the parties hereto relating to the escrow arrangements for the Earn Out
Stock.
13. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed to be an original. In order for
this Agreement to be effective, it shall not be necessary for all counterparts
to be signed by each party hereto, provided that at least one counterpart of
this Agreement is signed by each of the parties hereto.
[SIGNATURES ON FOLLOWING PAGE]
-5-
<PAGE>
EXECUTED on 11/6, 1996.
ZMAX CORPORATION
By: /s/ Norm Wareham
-----------------------------------------
Name: Norm Wareham
Title: Vice President
/s/ Michael S. Cannon
- ----------------------------------------------
Michael S. Cannon
/s/ Michael C. Higgins
- ----------------------------------------------
Michael C. Higgins
POWELL, GOLDSTEIN, FRAZER & MURPHY
By: /s/ Michael H. Chanin
------------------------------------------
Name: Michael H. Chanin
Partner
<PAGE>
Exhibit 10.13
ZMAX CORPORATION
STOCKHOLDERS AGREEMENT
THIS STOCKHOLDERS AGREEMENT (this "Agreement") is made on November 6, 1996,
among MICHAEL C. HIGGINS and MICHAEL S. CANNON (collectively, the "Stockholders"
and each individually, a "Stockholder") and ZMAX CORPORATION, a Nevada
corporation (the "Corporation").
BACKGROUND:
The Stockholders presently own shares of the Corporation's authorized
common stock, par value $0.001 (the "Stock").
The Stock owned by the Stockholders was acquired as part of the acquisition
of Century Services, Inc., a Maryland corporation ("CSI"), by the Corporation,
pursuant to the Stock Purchase Agreement dated the same date as this Agreement,
among the Corporation and the Stockholders (the "Acquisition Agreement"). As a
result of the consummation of the transactions contemplated by the Acquisition
Agreement, CSI is now a wholly-owned subsidiary of the Corporation.
Additional Stock of the Corporation has been issued in the name of the
Stockholders but is subject to earn out pursuant to the terms of the Acquisition
Agreement (the "Earn Out Stock"). In connection with the Acquisition Agreement,
the Earn Out Stock has been placed into escrow pursuant to an Escrow Agreement
dated the same date as this Agreement among the Corporation, the Stockholders
and the escrow agent named therein (the "Escrow Agreement") and will be released
to the Stockholders on the terms and conditions stated in the Acquisition
Agreement and the Escrow Agreement. The Stockholders have voting rights to the
Earn Out Stock on the terms and conditions stated in the Acquisition Agreement
and the Escrow Agreement.
The Stockholders are each employed by CSI pursuant to employment agreements
dated the same date as this Agreement (each, an "Employment Agreement").
The Stockholders and the Corporation want to enter into this Agreement to
set forth their agreements regarding the antidilution, transferability and
repurchase of the Stock owned by the Stockholders under certain circumstances.
In consideration of the mutual representations, warranties, covenants and
agreements contained in this Agreement, the parties agree as follows:
<PAGE>
STATEMENT OF TERMS:
1. Restriction on Transfer of Stock. No Stockholder may sell, pledge,
--------------------------------
encumber, give, bequeath, or otherwise transfer or dispose of, or permit
to be sold, encumbered, attached or otherwise disposed of or transferred in any
manner to any person, trust, corporation or other legal entity, whether
voluntarily, involuntarily, or by operation of law, all or any portion of such
Stockholder's Stock or any rights thereto, including without limitation rights
to the Earn Out Stock, whether now owned or hereafter acquired, without first
complying with the terms of this Agreement or obtaining the prior written
consent of the Corporation. Any attempted transfer of Stock that is not in
accordance with the terms of this Agreement will be invalid and will not be
reflected on the Corporation's books. The Corporation and the Stockholders
acknowledge that the Stock owned by the Stockholder's has been pledged to the
Corporation pursuant to a Stock Pledge Agreement dated the same date as this
Agreement. Upon release of the Earn Out Stock from the Escrow Agreement, it
will become Stock for all purposes of this Agreement.
2. Sale of Stock; Right of First Refusal. A Stockholder who receives
-------------------------------------
a solicited or unsolicited offer from another to purchase such Stockholder's
Stock or portion thereof may sell or otherwise transfer for valuable
consideration all or any portion of such Stockholder's Stock if the Stockholder
complies with this Section 2.
(a) Notice of Proposed Sale. A Stockholder (a "Selling Stockholder")
-----------------------
who receives a Qualified Offer (as defined below) to buy such Stockholder's
Stock and who wishes to sell such Stock (the "Offered Stock"), must
promptly send a written notice to the Corporation (the "Sale Notice"), and
will offer (or be deemed to have offered), to sell the Offered Stock to the
Corporation at the same price and on the same terms included in the
Qualified Offer. The Sale Notice must include the identity of the proposed
transferee, the terms of the transfer, and the price offered by the
proposed transferee for the Offered Stock. The Selling Stockholder will be
bound to the terms of the Qualified Offer as stated in the Sale Notice and
will keep the Corporation informed of any material changes in the proposed
transfer. The Selling Stockholder will also provide the Corporation with
any other information regarding the Qualified Offer and the proposed
transfer as reasonably requested by the Corporation.
(b) Qualified Offer Defined. A Qualified Offer is defined for
-----------------------
purposes of this Agreement as a legally enforceable written offer which is
made at arm's length from an individual or entity who is financially
capable of carrying out the terms of the written offer.
(c) Purchase Option. The Corporation will have an option for 10
---------------
business days from the receipt of the Sale Notice to elect to purchase all,
but not less than all, of the Offered Stock. The Corporation may exercise
its option by sending a written notice to the Selling Stockholder
containing a statement that it is exercising its option pursuant to Section
2 of this Agreement.
-2-
<PAGE>
(d) Purchase Price. The purchase price of the Offered Stock will be
--------------
the price contained in the Qualified Offer.
(e) Terms of Payment. The purchase price of the Offered Stock will be
----------------
paid on the same terms as the terms contained in the Qualified Offer.
(f) Closing. The closing of the purchase and sale contemplated by
-------
this Section 2 will occur at the offices of the Corporation or other
reasonable place as the Corporation may designate no later than 10:00 a.m.
on the 30th day following the Corporation's election to purchase all of the
Offered Stock or the next business day.
(g) Waiver. If the Corporation does not exercise its option to
------
purchase the Offered Stock, the Selling Stockholder may sell the Offered
Stock to the proposed transferee at a price and on terms and conditions no
less favorable than those set forth in the Sale Notice and in strict
accordance with this Agreement. The Corporation, upon request of the
Selling Stockholder, will provide written evidence to the Selling
Stockholder that it has waived its option, so as to permit the transfer of
the Offered Stock. If the Selling Stockholder fails to make the sale to
the proposed transferee within 30 days following the Corporation's waiver
of its option to purchase the Offered Stock, the waiver for such sale will
lapse and any subsequent proposed transfer to the proposed transferee or
another transferee will again be subject to the terms of this Agreement. A
transfer is consummated when the Corporation has been given notice that
legal title to the shares of the Offered Stock has been transferred,
subject to recordation on the books of the Corporation. Any person or
entity acquiring Stock under this Section 2 will take the Offered Stock
free and clear of any restrictions set forth in this Agreement but subject
to any applicable federal or state securities laws.
(h) Unrestricted Trading Stock. The Stockholders are not required to
--------------------------
comply with the provisions of Sections 1 or 2 of this Agreement in order to
effect a sale or disposition of their Stock made in compliance with
Securities Exchange Commission Rule 144.
3. Termination of Employment for Cause. If the employment of any
-----------------------------------
Stockholder (the "Terminated Stockholder") is terminated for cause pursuant to
Section 3.2(b)(iii) or (iv) of the Terminated Stockholder's Employment
Agreement, the provisions of this Section 3 will apply.
(a) Purchase Option. The Terminated Stockholder will offer (or be
---------------
deemed to have offered) on the date of termination (the "Termination Date")
to sell all of his Stock to the Corporation. The Corporation will have an
option for 30 days from the Termination Date to elect to purchase all or
any part of the Terminated Stockholder's Stock. The Corporation may
exercise its option by sending a written notice to the Terminated
Stockholder containing a statement that it is exercising its option
pursuant to
-3-
<PAGE>
the Section 3 of this Agreement and indicating the number of shares of the
Terminated Stockholder's Stock to be purchased.
(b) Option Purchase Price. The price of the Terminated Stockholder's
---------------------
Stock will be the Current Value Price as determined pursuant to Section 8.
(c) Terms of Purchase. The price of the Terminated Stockholder's
-----------------
Stock will be paid by certified check or wire transfer in immediately
available funds by the Corporation to the Terminated Stockholder or his
representative.
(d) Closing. The closing of the purchase and sale contemplated by
-------
this Section 3 will occur at the offices of the Corporation or other
reasonable place as the Corporation may designate no later than 10:00 a.m.
on the 10th business day following the later of (i) the date on which the
Corporation exercises its purchase option pursuant to Section 3(a) or (ii)
the date on which the Current Value Price is finally determined. At the
closing, the Corporation will pay the purchase price to the Terminated
Stockholder or his representative and the Terminated Stockholder will
deliver to the Corporation the certificates evidencing the Terminated
Stockholder's Stock, duly endorsed for transfer.
4. Other Termination of Employment or Disability of Stockholder. If the
------------------------------------------------------------
employment of any Stockholder is terminated for any reason, excluding the reason
stated in Section 3 of this Agreement and excluding the expiration of the
Terminated Stockholder's Employment Agreement by its terms, or if the
Stockholder becomes permanently disabled (as defined below), the provisions of
this Section 4 will apply. For purposes of this Section 4, "permanent
disability" means (1) the total inability of the Stockholder to perform his
duties under the Stockholder's Employment Agreement for a period of 60
consecutive days as certified by a physician reasonably acceptable to the
Corporation and the Stockholder, or (2) the Stockholder becomes entitled to (A)
disability retirement benefits under the federal Social Security Act, or (B)
recover benefits under any long term disability plan or policy maintained by the
Corporation. The date on which a permanent disability is determined to have
occurred is called the "Disability Determination Date."
(a) Mandatory Offer to Sell; Purchase Option; Purchase Price. The
--------------------------------------------------------
terminated or disabled Stockholder (the "Offering Stockholder") will offer
all of its Stock in the Corporation for sale to the Corporation at a
purchase price to be designated by the Offering Stockholder by sending a
written notice to the Corporation setting forth the offer price (the "Offer
Notice"), which Offer Notice must be delivered by the Offering Stockholder
within 60 days after (i) the Termination Date or (ii) the latter of (A) the
Disability Determination Date or (B) the qualification of a guardian of the
property of the disabled Stockholder (if a guardian is required), as
applicable. If the Offering Stockholder or the Offering Stockholder's
guardian fails to send an Offer Notice to the Corporation within the
relevant 60 day period, the Offering Stockholder will be deemed to have
offered his Stock to the Corporation for the Current Value Price as
determined pursuant to Section 8. Upon receipt of the Offer Notice or the
expiration of the 60 day
-4-
<PAGE>
period, as applicable, the Corporation will have an option for 30 days to
elect to purchase all or any part of the Stock of the Offering Stockholder
for the offer price stated in the Offer Notice or the Current Value Price,
as applicable. The Corporation may exercise its option to purchase by
sending a written notice to the Offering Stockholder containing a statement
that it is exercising its option pursuant to Section 4 of this Agreement
and indicating the number of shares of Stock to be purchased and the
applicable purchase price. The Corporation and the Offering Stockholder or
the Offering Stockholder's guardian, as applicable, may also negotiate a
mutually agreeable price of the Stock during such period but, failing, such
agreement, the Offer Notice or the Current Value Price, as applicable, will
be the purchase price.
(b) Terms of Purchase. The price of the Offering Stockholder's Stock
-----------------
will be paid by certified check or wire transfer in immediately available
funds by the Corporation to the Offering Stockholder or his representative.
(c) Closing. The closing of the purchase and sale contemplated by
-------
this Section 4 will occur at the offices of the Corporation or other
reasonable place as the Corporation may designate no later than 10:00 a.m.
on the 10th business day following the later of (i) the date on which the
Corporation exercises its purchase option pursuant to Section 4(a) or (ii)
the date on which the Current Value Price is finally determined, if
applicable. At the closing the Corporation will pay the purchase price to
the Offering Stockholder or his representative and the Offering Stockholder
will deliver to the Corporation the certificates evidencing the Offering
Stockholder's Stock, duly endorsed for transfer.
5. Breach of Restrictive Covenants after Termination of Employment. If
---------------------------------------------------------------
following termination of any Stockholder's Employment Agreement, the Stockholder
(the "Breaching Stockholder") is determined by the Corporation (and confirmed by
arbitration, if applicable) to have breached any covenants or restrictions
contained in Sections 4 and 5 of the Breaching Stockholder's Employment
Agreement, the provisions of this Section 5 will apply.
(a) Purchase Option. The Breaching Stockholder will offer (or be
---------------
deemed to have offered) on the date of the Corporation makes a
determination of the breach (the "Breach Date") to sell all of his Stock to
the Corporation. The Corporation will have an option for 30 days from the
Breach Date to elect to purchase all or any part of the Breaching
Stockholder's Stock. The Corporation may exercise its option by sending a
written notice to the Breaching Stockholder containing a statement that it
is exercising its option pursuant to the Section 5 of this Agreement and
indicating the number of shares of the Breaching Stockholder's Stock to be
purchased.
(b) Option Purchase Price. The price of the Breaching Stockholder's
---------------------
Stock will be the Current Value Price as determined pursuant to Section 8.
-5-
<PAGE>
(c) Terms of Purchase. The price of the Breaching Stockholder's Stock
-----------------
will be paid by certified check or wire transfer in immediately available
funds by the Corporation to the Breaching Stockholder or his
representative.
(d) Closing. The closing of the purchase and sale contemplated by
-------
this Section 5 will occur at the offices of the Corporation or other
reasonable place as the Corporation may designate no later than 10:00 a.m.
on the 10th business day following later of (i) the date of which the
Corporation exercised its option pursuant to Section 5(a) or (ii) the date
on which the Current Value Price is finally determined. At the closing,
the Corporation will pay the purchase price to the Breaching Stockholder or
his representative and the Breaching Stockholder will deliver to the
Corporation the certificates evidencing the Breaching Stockholder's Stock,
duly endorsed for transfer.
6. Death of a Stockholder. If any Stockholder dies, the provisions of
----------------------
this Section 6 will apply.
(a) Mandatory Buy-Sell. the Corporation will purchase and the deceased
------------------
Stockholder's estate, personal representative, legatees, or other
successors in interest (the "Stockholder's Estate") will sell all of the
Stock held by the Stockholder's Estate.
(b) Purchase Price. The purchase price of the deceased Stockholder's
--------------
Stock will be the Current Value Price as determined pursuant to Section 8.
(c) Terms of Purchase. The purchase price of the Stock of the
-----------------
Stockholder's Estate will be paid by certified check or wire transfer in
immediately available funds by the Corporation to the Stockholder's Estate.
(d) Closing. The closing of the purchase and sale contemplated by
-------
this Section 6 will occur at the offices of the Corporation or other
reasonable place as the Corporation may designate no later than 10:00 a.m.
on the 10th business day following the later of (i) the date on which the
Corporation receives the last of the insurance proceeds from life insurance
policies maintained on the deceased Stockholder, or (ii) the date of
qualification of the executor or personal representative of the estate of
the deceased Shareholder. At the closing, the Corporation will deliver the
purchase price to the Stockholder's Estate and the Stockholder's Estate
will deliver to the Corporation the certificates evidencing the deceased
Stockholder's Stock, duly endorsed for transfer.
(e) Earn Out Stock. After the death of a Stockholder, any Earn Out
--------------
Stock subsequently received by the Stockholder's Estate will remain subject
to the provisions of this Section 6 and are subject to sale by the
Stockholder's Estate and purchase by the Company on the terms of this
Section 6 at the time of earn out.
-6-
<PAGE>
7. Insurance. The Corporation will acquire policies of life or disability
---------
"business buy-out" insurance on the Stockholders as it deems appropriate to
carry out this Agreement. The Corporation will review the coverage level of
such policies on a semi-annual basis ensure that the coverage provided is
roughly equivalent to the number of shares of Stock held by the Stockholder
times the Current Value Price. Each Stockholder will cooperate fully in the
Corporation's acquisition of such policies, including submitting to any physical
examinations and providing any medical information required by the insurer.
8. Current Value Price. The purchase price for the Stock for purposes of
-------------------
Sections 3 through 6 of this Agreement will be (i) if the Stock is trading, the
average per share closing bid price on the Stock over the two week period
immediately preceding the Termination Date, Disability Determination Date,
Breach Date or date of death, as applicable, or (ii) if the Stock is not
trading, the per share value as determined by Arthur Andersen or such other
independent accounting firm then servicing the Corporation as of the Termination
Date, Disability Determination Date, Breach Date or date of death, as
applicable. The per share purchase price determined pursuant to this Section 8
is referred to as the "Current Value Price".
9. Legal Prohibition on Acquisition of Shares by Corporation. In the
---------------------------------------------------------
event any purchase or repurchase of Stock by the Corporation is prohibited in
whole or in part pursuant the Nevada Revised Statutes, or any successor section
or portion thereof, then the prohibited portion of the acquisition will be
delayed until such time, if ever, that the Corporation is legally able to
consummate such acquisition. However, this delay does not apply in the case of
a purchase pursuant to Section 2 of this Agreement.
10. Participation of Offering Stockholder. If the Selling Stockholder,
-------------------------------------
Offering Stockholder, Terminated Stockholder, Breaching Stockholder or Disabled
Stockholder, as applicable, is also a director of the Corporation, he will not
participate in the determination by the Corporation whether to exercise any
purchase option granted pursuant to this Agreement and will consent to the
determination reached by the Board of Directors of the Corporation.
11. Legends on Stock Certificates. Each certificate representing shares
-----------------------------
of Stock now or hereafter held by the Stockholders will bear two separate
legends in substantially the following forms:
The shares represented by this certificate (the "Securities") have been
issued and sold in reliance upon an exemption from registration under the
Securities Act of 1933 (the "1933 Act") and the applicable securities laws
of any other jurisdiction. The Securities may only be offered for sale,
sold or transferred (i) pursuant to an effective registration or an
exemption therefrom under the 1933 Act and the applicable securities laws
of any other jurisdiction, and (ii) upon receipt by the issuer of evidence
satisfactory to it of compliance with the 1933 Act and the applicable
securities laws of any other jurisdiction. The issuer will be entitled to
require an opinion of counsel satisfactory to it with respect to compliance
with the above laws.
-7-
<PAGE>
Notice is hereby given that the sale, assignment, pledge, hypothecation,
transfer or other disposition of the shares of Stock represented by this
certificate is restricted for a period of 3 years under the terms of a
Stockholders Agreement dated November 6, 1996, a copy of which is on file
at the office of the Corporation (the "Stockholders Agreement"), and all of
the provisions of the Stockholders Agreement are incorporated by reference
in this certificate.
12. Securities Laws. The Stockholders acknowledge that the Stock of the
---------------
Corporation acquired by them has not been registered under the Securities Act of
1933 (the "Act") or any state securities law (the "State Act").
(a) The Stockholders severally represent and warrant that they did not
acquire their shares of Stock with a view to effecting a distribution, and
that they will hold such shares of Stock indefinitely unless subsequently
registered under the Act and the State Acts or unless an exemption from
such registration is available and an opinion of counsel for the
Corporation, in form and substance satisfactory to the Corporation, is
obtained to that effect. The provisions of this Agreement are in all
respects subject to the restrictions of the Act and the State Acts and the
rules and regulations thereunder.
(b) Each Stockholder realizes that the Corporation does not file
periodic reports in accordance with the provisions of Section 13 or 15(d)
of the Securities and Exchange Act of 1934.
13. Amendment. This Agreement may not be amended or modified except by an
---------
instrument in writing signed on behalf of each of the parties.
14. Notices. All notices, demands, consents or other communications
-------
required under this Agreement must be in writing and shall be given to the
Corporation and to any of the Stockholders at the following addresses or at such
other addresses as a party may hereafter specify in writing to the other
parties:
If to the Corporation: ZMAX Corporation
c/o Powell, Goldstein, Frazer & Murphy
1001 Pennsylvania Avenue, N.W.
Sixth Floor South
Washington, D.C. 20004
Attention: Michael H. Chanin, Esq.
Telephone: (202) 624-7235
Fax: (202) 624-7222
-8-
<PAGE>
If to the Stockholders: Michael C. Higgins
12408 Rivers Edge Drive
Potomac, Maryland 20854
Telephone: (301) 926-6771
And/Or (As applicable): Michael S. Cannon
46367 Hampshire Station
Sterling, Virginia 20165
Telephone: (703) 404-2726
Any such notice or other communication must be delivered by hand, or mailed by
registered or certified mail, return receipt requested, first-class postage
prepaid, or delivered by reputable overnight courier with receipt for delivery
or sent by fax with confirmation of transmission. All notices will be deemed
effective upon receipt or refusal of receipt. Any notice sent by fax must be
followed by a hard copy of such notice sent by U.S. first-class mail or any
other manner set forth above.
15. Termination of Agreement. This Agreement will be effective for a
------------------------
period of 3 years from the date of this Agreement.
16. Nonwaiver of Default. Any failure by any party to this Agreement, at
--------------------
any time or from time to time, to enforce and require the strict keeping and
performance of any of the terms and conditions of this Agreement will not
constitute a waiver of any such terms or conditions at any future time and will
not prevent such party from insisting on the strict keeping and performance of
such terms and conditions at any later time.
17. After-Acquired Stock. Whenever any Stockholder acquires any
--------------------
additional shares of Stock other than the shares of Stock acquired at the
execution of this Agreement, such shares of Stock will be subject to all of the
terms of this Agreement.
18. Successors and Assigns. This Agreement will be binding upon and inure
----------------------
to the benefit of the parties hereto and their respective heirs, legal
representatives, executors, administrators, successors and assigns.
19. Headings. The section and other headings in this Agreement are
--------
inserted solely as a matter of convenience and for reference and are not a part
of this Agreement and will not affect the meaning or interpretation of this
Agreement.
20. Entire Agreement. This Agreement and all documents referenced in this
----------------
Agreement constitute the entire understanding of the Parties with respect to the
subject matter of this Agreement and supersedes all prior and/or contemporaneous
agreements, representations, warranties, or communications, whether oral or
written, express or implied.
-9-
<PAGE>
21. Governing Law. This Agreement and the rights of the parties to this
-------------
Agreement, will be construed under, and governed by the laws of the State of
Maryland.
22. Enforcement. Each party to this Agreement (i) submits to personal
-----------
jurisdiction in the State of Maryland for the enforcement of this Agreement, and
(ii) waives any and all rights under the laws of any state to object to
jurisdiction within the State of Maryland for the purposes of litigation to
enforce this Agreement.
23. Injunctive Relief. Should any dispute concerning the transfer of
-----------------
Stock arise under this Agreement, an injunction may be issued restraining the
transfer of such stock pending the determination of such dispute.
24. Further Acts. Each party agrees to perform any further acts and to
------------
execute and deliver any instruments or documents that may be necessary or
reasonably deemed advisable to carry out the purposes of this Agreement.
25. Severability. The parties agree that each of the provisions included
------------
in this Agreement is separate, distinct, and severable from the other provisions
of this Agreement, and that the invalidity or unenforceability of any provision
of this Agreement will not affect the validity or enforceability of any other
provision of this Agreement. Further, if any provision of this Agreement is
ruled invalid or unenforceable by a court of competent jurisdiction because of a
conflict between the provision and any applicable law or public policy, the
provision will be redrawn to make the provision consistent with and valid and
enforceable under the law or public policy.
26. Separate Counsel. By signing this Agreement, the parties acknowledge
----------------
that they have had the opportunity to obtain separate legal counsel and advice
regarding the Agreement and that they have read and understand this Agreement.
This Agreement will be construed without regard to any presumption or other rule
requiring construction against the party causing this Agreement to be drafted
and the parties agree that the agents of all the parties have participated in
the preparation of this Agreement equally.
27. Counterparts. This Agreement may be executed in one or more
------------
counterparts, all of which will be considered one and the same agreement and
will become effective when one or more counterparts have been signed by each of
the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
[SIGNATURES ON FOLLOWING PAGE.]
-10-
<PAGE>
EXECUTED on November 6, 1996.
CORPORATION:
ZMAX CORPORATION
By: /s/ Norm Wareham
-------------------------------
Name: Norm Wareham
Title: Vice President
STOCKHOLDERS:
/s/Michael S. Cannon
- ------------------------------------
Michael S. Cannon
/s/Michael C. Higgins
- ------------------------------------
Michael C. Higgins
-11-
<PAGE>
Exhibit 10.14
[THE STOCK PLEDGE AGREEMENT FOR MICHAEL S. CANNON
IS IDENTICAL IN ALL MATERIAL RESPECTS.]
STOCK PLEDGE AND SECURITY AGREEMENT
THIS STOCK PLEDGE AND SECURITY AGREEMENT (this "Agreement"), is made on
November 6, 1996, by Michael C. Higgins, an individual resident of the State of
Maryland (the "Pledgor"), in favor of ZMAX Corporation, a Nevada corporation
(the "Corporation").
BACKGROUND:
The Pledgor owns shares of the Corporation's authorized common stock, par
value $0.001 (the "Shares").
The Shares owned by the Pledgor were acquired as part of the acquisition of
Century Services, Inc., a Maryland corporation ("CSI") by the Corporation,
pursuant to the Stock Purchase Agreement dated the same date as this Agreement,
among the Corporation, the Pledgor and the other stockholder of CSI (the
"Acquisition Agreement"). As a result of the consummation of the transactions
contemplated by the Acquisition Agreement, CSI is now a wholly-owned subsidiary
of the Corporation.
Additional shares of the Corporation's authorized common stock, par value
$0.001, have been issued in the name of the Pledgor but are subject to earn out
pursuant to the terms of the Acquisition Agreement (the "Earn Out Shares"). In
connection with the Acquisition Agreement, the Earn Out Shares have been placed
into escrow pursuant to an Escrow Agreement dated the same date as this
Agreement among the Corporation, the Pledgor, [name of other Pledgor] and the
escrow agent named therein (the "Escrow Agreement") and will be released from
the Escrow Agreement on the terms and conditions stated in the Acquisition
Agreement and the Escrow Agreement.
To secure the indemnification obligations of Pledgor pursuant to Section
5.2 of the Acquisition Agreement, as the same may be modified or amended after
the date hereof (collectively, the "Obligations"), the Pledgor has agreed to
pledge and assign to the Corporation all of the Pledgor's right, title, and
interest in and to the Shares and the Earn Out Shares together with the other
collateral hereinafter described (collectively, the "Stock").
NOW, THEREFORE, for and in consideration of the premises, the direct
benefits to be realized by the Pledgor from the Acquisition Agreement, the
mutual covenants hereinafter set forth, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
Pledgor hereby covenants and agrees with the Corporation as follows:
<PAGE>
STATEMENT OF TERMS:
1. Warranty. The Pledgor warrants to the Corporation that except for the
--------
security interest created hereby, the Pledgor owns the Stock free and clear of
all liens, charges, and encumbrances, that the Stock is duly issued, fully paid,
and non-assessable, that the Pledgor has the unencumbered and unrestricted right
to pledge the Stock, and that no consent or approval of any governmental or
regulatory authority, or of any securities exchange, which has not been obtained
was or is necessary to the validity of this pledge.
2. Security Interest. The Pledgor grants, conveys, and pledges to the
-----------------
Corporation a security interest in and security title to all of its right,
title, and interest in and to the Stock, and has transferred to the Corporation,
all of its right, title, and interest in and to, the Stock presently held by the
Pledgor as security for (a) all obligations of the Pledgor to the Corporation
hereunder; and (b) payment and performance of the Obligations. The Pledgor has,
on this date, delivered the Stock to and deposited the Stock with the
Corporation, together with stock powers endorsed in blank by the Pledgor. The
Pledgor agrees that at any time and from time to time, at the expense of the
Corporation, the Pledgor will promptly execute and deliver all further
instruments and documents, and take all further action that may be necessary, or
that the Corporation may reasonably request, in order to perfect and protect the
security interest granted hereby or to enable the Corporation to exercise and
enforce its rights and remedies hereunder with respect to all or any portion of
the Stock. The Pledgor further agrees that if this Agreement is still in effect
at the time of the release of any Earn Out Shares from the Escrow Agreement,
such Earn Out Shares will continue to be pledged to the Corporation under the
terms of this Agreement.
3. Additional Shares. In the event that, during the term of this
-----------------
Agreement:
(a) any stock dividend, stock split, reclassification, readjustment, or
other change is declared or made in the capital structure of the Corporation,
all new, substituted, and additional shares, or other securities, issued by
reason of any such change and received by the Pledgor or to which the Pledgor
shall be entitled shall be immediately transferred to the Corporation by
delivery, together with stock powers endorsed in blank by the Pledgor, and shall
thereupon constitute Stock to be held by the Corporation under the terms of this
Agreement; and
(b) subscriptions, warrants, or any other rights or options shall be
issued in connection with the Stock, all new stock or other securities acquired
through such subscriptions, warrants, rights, or options by the Pledgor shall be
immediately transferred by delivery to the Corporation and shall thereupon
constitute Stock to be held by the Corporation under the terms of this
Agreement.
4. Default. From time to time during the term of this Agreement, upon the
-------
occurrence of a default by Pledgor under the Acquisition Agreement which
default, if susceptible to cure, is not cured by the Pledgor to the reasonable
satisfaction of the Corporation within 60
-2-
<PAGE>
days after the Corporation give the Pledgor notice of such default, the
Corporation may (i) transfer the Stock or such portion of the Stock based on the
Current Value Price (as defined below) necessary to satisfy the Obligations as a
result of such default, into the name of the Corporation or designate such Stock
as treasury shares, or (ii) transfer, sell, or otherwise dispose of the Stock or
such portion of the Stock based on its Current Value Price necessary to satisfy
the Obligations as a result of such default, at a public or private sale or make
other commercially reasonable disposition of the Stock or any portion thereof
after five (5) days' notice to the Pledgor. The proceeds of the public or
private sale or other disposition, if any, shall be applied to the costs
incurred in connection with the sale, and to the Obligations, in such order as
the Corporation may determine, and any remaining proceeds shall be converted
back into Shares based on the Current Value Price which shall remain subject to
this Agreement, or if this Agreement is no longer in effect, shall be returned
to the Pledgor. In the event the Current Value Price of any portion of the
Stock transferred into the name of the Corporation or designated as treasury
shares or the proceeds of the sale or other disposition of the Stock, if any,
are insufficient to pay such expenses, interest, principal of the Obligations,
and damages, the Pledgor shall remain liable to the Corporation for any such
deficiency. For purposes of this Agreement, Current Value Price is (i) if the
Shares are trading, the average per share closing bid price on the Shares over
the two week period immediately preceding the date of which the default
occurred, or (ii) if the Shares are not trading, the per share value as of the
date the default occurred as such value is as determined by Arthur Andersen or
such other independent accounting firm then servicing the Corporation.
5. Additional Rights of Secured Party. In addition to its rights and
----------------------------------
privileges under this Agreement, the Corporation shall have all the rights,
powers, and privileges of secured parties under the Uniform Commercial Code of
the State of Maryland and other applicable law. All rights of the Corporation
shall be cumulative and not exclusive.
6. Pledgor's Obligations Absolute. The obligations of the Pledgor under
------------------------------
this Agreement shall be direct and immediate and not conditional or contingent
upon the pursuit of any remedies against any other person, nor against other
security or liens or encumbrances available to the Corporation or any of its
successors, assigns, or agents.
7. Voting Rights.
-------------
(a) So long as a default by Pledgor has not occurred under the
Acquisition Agreement or under this Agreement, Pledgor shall be entitled to
exercise all voting rights and all other rights of the Stock.
(b) Upon the occurrence of a default by Pledgor under the Acquisition
Agreement or under this Agreement, and during the continuance thereof, and for
so long as any of the Obligations remain unpaid, (i) the Corporation may, upon
one (1) day prior written notice to the Pledgor of its intention to do so,
exercise all voting rights and all other rights of the Stock, but under no
circumstances is the Corporation obligated by the terms of this Agreement to
exercise
-3-
<PAGE>
such rights, and (ii) the Pledgor hereby appoints the Corporation the Pledgor's
true and lawful attorney-in-fact and IRREVOCABLE PROXY to vote the Stock in any
manner the Corporation deems advisable for or against all matters submitted or
which may be submitted to a vote of shareholders. The power of attorney granted
hereby is coupled with an interest and shall be irrevocable for so long as any
of the Obligations remain unpaid.
(c) For so long as the Pledgor shall have the right to vote the Stock,
the Pledgor covenants and agrees that it will not, without the prior written
consent of the Corporation, which consent will not be unreasonably withheld,
vote or take any consensual action with respect to the Stock which would
constitute a breach of this Agreement or a default under the Acquisition
Agreement.
8. Termination. This Agreement, and the security interest hereunder
-----------
granted to the Corporation in the Stock, shall terminate on the date that is
nine months after the date of this Agreement. Thereafter, the Corporation shall
promptly release the Stock by delivery of the Stock to the Pledgor, unless and
except to the extent the Stock has been transferred to the name of the
Corporation, liquidated or otherwise disposed of pursuant to this Agreement.
9. Security Agreement. This Agreement shall constitute a security
------------------
agreement under the Uniform Commercial Code as in effect in the State of
Maryland.
10. General.
-------
(a) Time is of the essence of this Agreement. No waiver by the
Corporation of any power or right hereunder or of any breach or default by the
Pledgor hereunder shall be binding upon the Corporation unless in writing signed
by the Corporation. No failure or delay by the Corporation to exercise any power
or right hereunder or binding waiver of any default hereunder shall operate as a
waiver of any other or further exercise of such power or any other breach or
default. This Agreement, together with all documents referred to herein,
constitutes the entire agreement between the Pledgor and the Corporation and may
not be modified except by a writing executed by the Corporation and delivered by
the Corporation to the Pledgor.
(b) If any paragraph or part hereof shall for any reason be held or
adjudged to be invalid, illegal, or unenforceable by any court of competent
jurisdiction, such paragraph or part thereof so adjudicated invalid, illegal, or
unenforceable shall be deemed separate, distinct, and independent, and the
remainder of this Agreement shall remain in full force and effect and shall not
be affected by such holding or adjudication.
(c) All representations and warranties made and given herein by the
Pledgor shall survive the execution and delivery of this Agreement and shall
remain in full force and effect until such time as this Agreement terminates as
provided in Section 8 hereof.
-4-
<PAGE>
(d) The rights and obligations of the parties hereunder shall inure to
the benefit of and bind their respective heirs, executors, administrators, legal
representatives, successors, and assigns.
(e) This Agreement shall be governed by and construed in accordance
with the laws of the State of Maryland.
(f) Each party to this Agreement (i) submits to personal jurisdiction
in the State of Maryland for the enforcement of this Agreement, and (ii) waives
any and all rights under the laws of any state to object to jurisdiction within
the State of Maryland for the purposes of litigation to enforce this Agreement.
(g) All notices and demands required or permitted hereunder or by law
shall be in writing and delivered by fax transmission or by recognized
international express courier, at the addresses set forth below, or such other
address as shall be subsequently designated in writing by such party to the
other party hereto for purposes of notice.
If to the Corporation: ZMAX Corporation
c/o Powell, Goldstein, Frazer & Murphy
1001 Pennsylvania Ave., N.W.
Sixth Floor South
Washington, D.C. 20004
Attention: Michael H. Chanin, Esq.
Telephone: 202-624-7235
Fax: 202-624-7222
If to the Pledgor: Michael C. Higgins
12408 Rivers Edge Drive
Potomac, Maryland 20854
Telephone: (301) 926-6771
Each such notice or demand shall be deemed effective (a) if sent by fax
transmission, upon receipt of electronic or verbal confirmation therefor, of (b)
if sent by express courier, two business days after deposit with the courier
service.
(g) Captions are for reference only and in no way limit the terms of
this Agreement.
(h) All references herein to any document, instrument, or agreement
shall be deemed to refer to such document, instrument, or agreement as the same
may be amended, modified, restated, supplemented, or replaced from time to time.
[SIGNATURE ON FOLLOWING PAGE]
-5-
<PAGE>
EXECUTED ON NOVEMBER 6, 1996.
PLEDGOR:
/s/ Michael C. Higgins
-----------------------------------------------
Michael C. Higgins
<PAGE>
Exhibit 10.15
April 30, 1997
Mr. Michael C. Higgins
President
ZMAX Corporation
20251 Century Boulevard
Germantown, MD 20874
Re: Purchase and Sale of Change of Century Analysis and Conversion Tool
("COCACT") Software Program
Dear Mr. Higgins:
Under a letter agreement dated as of April 30, 1997 (the "Purchase
Agreement") between Wan Hsien Information International Corporation Ltd.
("Seller") and ZMAX Corporation, a Nevada corporation ("ZMAX") with respect to
the purchase by ZMAX (or one or more controlled affiliates designated by ZMAX)
(collectively, "ZMAX") is to purchase all right, title and interest in and to
the above-referenced COCACT software program and related documentation (the
"Software").
1. Representations to ZMAX. In order to induce ZMAX to consummate the
-----------------------
purchase of the Software, the undersigned jointly and severally represent and
warrant to ZMAX that (i) Seller owns all right, title and interest in the
Software, and (ii) IMS International, Inc. ("IMSI") has no present or continuing
rights in the Software and neither IMSI nor Seller have previously granted any
rights in the Software to any party other than ZMAX's affiliate Century
Services, Inc. ("CSI").
2. Existing License Cancellation Rights. In connection with the purchase
------------------------------------
of the Software under the Purchase Agreement and as a further inducement to ZMAX
to consummate such purchase, Seller, III, IMSI and Multi-Dimension International
("MDI") hereby agree that ZMAX may at any time after the closing of the
transactions contemplated by the Purchase Agreement, by written notice to MDI at
any time, terminate and cancel that certain Exclusive License grant dated April
1, 1996 between MDI (as successor to IMSI) and CSI (the "North American
License"). Upon the delivery of any such notice of termination, all obligations
of CSI under the North American License, including any obligation to pay any
license fees payable thereunder, whether due or not yet due, shall immediately
cease and terminate without further liability or obligation of any kind.
Notwithstanding the foregoing, if ZMAX cancels and rescinds the Software
purchase under the Purchase Agreement, any termination notice previously given
by ZMAX to MDI with respect to the North American License will automatically be
deemed rescinded, whereupon ZMAX's rights and obligations
<PAGE>
Mr. Michael C. Higgins
ZMAX Corporation
April 30, 1997
Page 2
under the North American License (including ZMAX's obligation to pay any license
fees then due or to become payable thereunder) shall be deemed immediately
reinstated retroactive to the time of the termination notice as if such notice
had not been given.
3. Binding Provisions. This letter reflects the parties' agreements and
------------------
shall be construed as a binding and enforceable agreement.
4. Governing Law and Venue. This agreement shall be deemed made in and
-----------------------
shall be governed and construed in accordance with the internal laws of the
state of Maryland. Each of the parties hereto hereby irrevocably consents to
the exclusive jurisdiction of U.S. courts in any legal or equitable action to
enforce this agreement, and (i) hereby waives sovereign immunity and irrevocably
submits itself to the jurisdiction of the appropriate federal or state court in
Maryland and (ii) to the extent permitted by applicable law, hereby waives and
agrees not to assert that any such action is brought in an inconvenient forum or
that venue of such action is improper.
5. Specific Performance. Each of the parties hereto agrees that upon any
--------------------
breach or threatened breach of this agreement irreparable injury will result to
ZMAX and money damages will be inadequate to fully remedy ZMAX's injury.
Therefore, in the event of any breach or threatened breach hereof, ZMAX shall be
entitled without posting a bond to an order of specific performance or other
equitable relief in addition to any other rights or remedies available to ZMAX
at law.
Very truly yours,
IMS INTERNATIONAL, INC. WAN HSIEN INFORMATION
INTERNATIONAL CORPORATION, LTD.
By: /s/ Frank C. Hu By: /s/ Yu-Chung Hu
------------------------------ --------------------------------
Name: Frank C. Hu Name: Yu-Chung Hu
---------------------------- ------------------------------
Title: President Title: President
--------------------------- -----------------------------
MULTI-DIMENSION INSTITUTE FOR INFORMTION
INTERNATIONAL INDUSTRY
By: /s/ Frank C. Hu By: /s/ Cheng Lee Chang
------------------------------ --------------------------------
Name: Frank C. Hu Name: Cheng Lee Chang
---------------------------- ------------------------------
Title: President Title: Vice President
--------------------------- -----------------------------
<PAGE>
Exhibit 10.16
April 30, 1997
Institute for Information Industry
11th Floor
106 Hoping E. Road, Sec. 2
Taipei, Taiwan
REPUBLIC OF CHINA
OUTSIDE U.S.A.
- --------------
Re: Change of Century Analysis and Conversion Tool ("COCACT") Software
Program
Gentlemen:
Please reference that certain letter agreement dated as of April 30, 1997
(the "Purchase Agreement") between Wan Hsien Information International
Corporation Ltd. ("Seller") and ZMAX Corporation, a Nevada corporation ("ZMAX")
with respect to the purchase by ZMAX (or one or more controlled affiliates
designated by ZMAX (collectively, "Buyer") of all right, title and interest in
and to the above-referenced COCACT software program and related documentation
more particularly described in the specifications attached to the Purchase
Agreement as Exhibit A (the "Software"). The Software was developed by the
---------
Institute for Information Industry ("III") and all worldwide rights in and to
the Software have been transferred by III to Seller.
In order to induce Buyer to enter into the Purchase Agreement, III
represents and warrants that (i) III has transferred all worldwide rights in and
to the Software to Seller, including all of the rights described in Paragraph 1
of the Purchase Agreement to be transferred from Seller to Buyer, (ii) Seller
owns all right, title and interest in the Software, and (iii) III agrees that it
will be equally responsible with Seller for all representations, warranties and
commitments made by Seller under the Purchase Agreement.
1. Covenants and Agreements of III. In connection with the purchase of
-------------------------------
the Software under the Purchase Agreement and as a further inducement to Buyer
to execute the Purchase Agreement, III agrees as follows:
<PAGE>
Institute for Information Industry
April 30, 1997
Page 2
a. Until the closing of the transactions contemplated by the Purchase
Agreement (the "Closing") and for a period of six (6) months thereafter,
III will not entertain, solicit, discuss or accept offers from any party
other than Buyer to purchase, license, lease or otherwise transfer any
rights in the Software.
b. Prior to and for six (6) months after Closing, III will make
available to Buyer, and to Buyer's representatives, access to the III's
facilities and personnel involved in the development or marketing of the
Software and such information and documents relating to the Software as
Buyer may reasonably request to perform Buyer's due diligence review of the
Software and verify the accuracy of Seller's representations and warranties
in the Purchase Agreement.
c. Promptly after execution of the Purchase Agreement and for a period
of four (4) months after the date hereof, III will cause Seller to comply
with and perform the obligations of Seller under Paragraph 6c of the
Purchase Agreement.
d. Prior to and as a condition to payment of the deferred Purchase Price
under Paragraph 3 of the Purchase Agreement, III agrees to enter into a
Services and Support Agreement with CSI to provide computer programming and
support services to CSI and its customers as follows: III will provide
programming services to customers of CSI at III's facility in Taipei for an
unlimited number of lines of code at the following prices: (i) for twenty-
five cents (US$.25) per line of code for COBOL conversion and unit test
programming and (ii) for thirty-five cents (US$.35) per line of code for
PL/1 conversion and unit test programming. Such Services and Support
Agreement will also include the provisions for the additional services and
terms specified as Exhibit A hereto and will be provided at such rates and
---------
on such terms until December 31, 2001. All support to be performed under
such Services and Support Agreement must be fully guaranteed by III.
2. Non-Disclosure. III and Buyer agree that under no condition will they
--------------
make any disclosures about the existence or contents of the Purchase Agreement
or this letter or negotiations relating to the proposed transaction therein or
cause to be publicized in any manner (by way of interviews, responses to
questions or inquiries, press releases or otherwise) any aspect of such
transactions, except as may otherwise be required by law. After closing, Buyer
may disclose its ownership of the Software and the fact that the Software was
initially developed by III.
3. Binding Provisions. This letter reflects the parties' agreements and
------------------
shall be construed as a binding and enforceable agreement. III represents to
Buyer that III is under no obligation, either oral or written, that would
restrict or inhibit III's ability to execute and
<PAGE>
Institute for Information Industry
April 30, 1997
Page 3
deliver this letter agreement or to take the actions or to complete the
transactions contemplated herein. Each party will pay its own expenses related
to this transaction.
4. Governing Law and Venue. This agreement shall be deemed made in and
-----------------------
shall be governed and construed in accordance with the internal laws of the
state of Maryland. III hereby irrevocably consents to the exclusive
jurisdiction of U.S. courts in any legal or equitable action to enforce this
agreement, and (i) hereby waives sovereign immunity and irrevocably submits
itself to the jurisdiction of the appropriate federal or state court in Maryland
and (ii) to the extent permitted by applicable law, hereby waives and agrees not
to assert that any such action is brought in an inconvenient forum or that venue
of such action is improper.
5. Specific Performance. III agrees that upon any breach or threatened
--------------------
breach of this agreement irreparable injury will result to Buyer and money
damages will be inadequate to fully remedy Buyer's injury. Therefore, in the
event of any breach or threatened breach hereof, Buyer shall be entitled without
posting a bond to an order of specific performance or other equitable relief in
addition to any other rights or remedies available to Buyer at law.
If the foregoing accurately reflects the agreements between us, please
indicate your acceptance and agreement below.
Very truly yours,
ZMAX CORPORATION
By: /s/ Michael C. Higgins
-------------------------------------
Name: Michael C. Higgins
-----------------------------------
Title: President
----------------------------------
ACCEPTED AND AGREED:
INSTITUTE FOR INFORMATION INDUSTRY
By: /s/ Cheng Lee Chang
-------------------------------
Name: Cheng Lee Chang
-----------------------------
Title: Vice President
----------------------------
<PAGE>
Exhibit 10.18
CONVERSION AGREEMENT
This Conversion Agreement is dated April 28, 1997 and is entered into by
Fiserv Federal Systems, Inc., a Delaware corporation ("Fiserv"), and ZMAX
Corporation, a Nevada corporation ("ZMAX").
BACKGROUND STATEMENTS
Fiserv was a joint venture partner in the Fiserv Century Services Joint
Venture, a Texas joint venture pursuant to a Joint Venture Agreement signed by
Fiserv and Century Services, Inc., a Maryland corporation ("CSI"), on April 17,
1996 (the "Joint Venture Agreement").
Pursuant to an Assignment, Transfer and Assumption Agreement dated
September 1, 1996, between NewDominion Capital Group ("NewDominion") and Fiserv
(the "First Assignment"), Fiserv transferred all of its rights,
responsibilities, interests, obligations and liabilities in the Joint Venture,
the Joint Venture Agreement and certain related credit and security agreements
to NewDominion in exchange for, among other consideration, NewDominion's
assumption of such rights, responsibilities, interests, obligations and
liabilities and NewDominion's Promissory Note dated the same date in the
principal amount of $385,000 (the "NewDominion Note"). As required by the Joint
Venture Agreement, CSI consented to the First Assignment.
Subsequently, pursuant to an Absolute Assignment of Contract dated
September 20, 1996, among NewDominion, Fiserv and ZMAX (the "Second
Assignment"), NewDominion transferred all of its rights, responsibilities,
interests, obligations and liabilities in the Joint Venture, the Joint Venture
Agreement and certain related credit and security agreements to ZMAX and ZMAX
assumed all of NewDominion's obligations under the First Assignment, including
the NewDominion Note. In connection with the Second Assignment, ZMAX delivered
its promissory note dated September 19, 1996 to Fiserv in the principal amount
of $385,000 (the "ZMAX Note"), which ZMAX Note was intended to replace the
NewDominion Note.
Fiserv and ZMAX have agreed to convert the ZMAX Note into common stock, par
value $0.001 of ZMAX ("ZMAX Stock") based on a conversion formula of the average
bid price of ZMAX Stock on March 31, 1997 less a 20% reduction.
AGREEMENT
1. The background statements to this Agreement are incorporated into this
Agreement and are acknowledged as true and correct by the parties.
2. The parties acknowledge that the ZMAX Note replaced the NewDominion
Note and that the NewDominion Note is null and void and that neither ZMAX nor
NewDominion has any further obligation to pay the NewDominion Note.
<PAGE>
3. ZMAX and Fiserv acknowledge and agree that (i) the principal amount
plus accrued and unpaid interest owing under the ZMAX Note as of March 31, 1997
is $405,776, as calculated based on Exhibit A attached to this Agreement, (ii)
---------
the average bid price for ZMAX Stock on March 31, 1997 was $15.8125, which
amount is the numerical average of the high bid price ($16.125) and the low bid
price ($15.5) for ZMAX Stock on that date as stated by the OTC Bulletin Board, a
service provided by the NASDAQ Stock Market, Inc., and (iii) after the 20%
reduction of such commercial average the conversion ratio for the ZMAX Note will
be based on a per share price of $12.65.
4. ZMAX and Fiserv agree that the ZMAX Note is hereby converted into the
right to receive 32,077 shares of ZMAX Stock (the "Conversion Stock"). Upon
execution of this Agreement, Fiserv will have no further rights under the ZMAX
Note and shall only have the right to receive the Conversion Stock as specified
in the preceding sentence.
5. ZMAX will promptly instruct its transfer agent to issue one certificate
for 32,077 shares of ZMAX Stock registered in the name of "Fiserv, Inc." and
deliver such certificates to Fiserv at its corporate address at 999 Summer
Street, Suite 200, Stamford, Connecticut 06905, Attention Steve L. Komar. The
Conversion Stock to be issued to Fiserv pursuant to Paragraph 4 above will be
"restricted securities" as that term is defined in Rule 144 under the Securities
Act of 1933 and will bear an appropriate restrictive legend.
6. Fiserv acknowledges and agrees that its right to receive the Conversion
Stock granted by this Agreement is in complete satisfaction of the ZMAX Note.
Upon receipt of the Conversion Stock described in Paragraph 4 above, Fiserv will
mark the original ZMAX Note "Paid in Full" and original NewDominion Note
"Replaced with Promissory Note from ZMAX Corporation" and return the originals
of both notes to ZMAX at its corporate headquarters at 20251 Century Boulevard,
Germantown, Maryland 20874, Attention: Michael C. Higgins.
7. ZMAX represents and warrants to Fiserv that (i) ZMAX is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Nevada; (ii) ZMAX has the power and authority to issue the Conversion
Stock as contemplated by this Agreement and such issuance has been duly approved
and authorized by all necessary corporate action; (iii) the Conversion Stock,
when issued, will be duly issued, fully paid and non-assessable and issued in
compliance with all applicable laws; (iv) the execution and delivery of this
Agreement and the issuance of the Conversion Stock to Fiserv as contemplated by
this Agreement does not (a) violate ZMAX's articles of incorporation or bylaws;
(b) violate any order, statute, rule or regulation to ZMAX; or (c) conflict,
with result in a violation of, or cause a default or breach under any material
agreement applicable to ZMAX or any of its properties or assets; and (v) no
consent or approval of any third party or governmental body is necessary for the
execution and delivery of this Agreement and the issuance of the Conversion
Stock to Fiserv as contemplated by this Agreement.
8. Fiserv represents and warrants to ZMAX that (i) it is the holder of and
has clear title to the NewDominion Note and the ZMAX Note, free and clear of all
liens, claims, charges, security interests and other encumbrances of any kind or
nature; (ii) neither the NewDominion Note nor the ZMAX Note has been endorsed,
transferred or assigned to any party; (iii) the
<PAGE>
Conversion Stock is being acquired for Fiserv's own account, solely for
investment and is not being acquired with a view to or for the resale or
distribution thereof and Fiserv has no present plans to enter into any agreement
for such resale or distribution; (iv) Fiserv has substantial experience in
business or investments, including ownership of interests in new ventures and
start-up companies, and is capable of bearing the high degree of economic risks
and burdens of the investment in the Conversion Stock including the possibility
of a complete loss of all investment capital and the lack of a liquid public
market; and (v) Fiserv has had access to all information about ZMAX's corporate
records and financial and operating history and has had the opportunity to
request copies of information, ask questions and/or receive answers from ZMAX
regarding such information and all questions have been answered to its
satisfaction.
9. ZMAX and Fiserv agree to cooperate with each other and execute and
deliver such other instruments and documents and take such other actions as may
be reasonably requested from time to time by either party hereto as necessary to
carry out, evidence and confirm the intended purposes of this Agreement.
10. This Agreement contains the entire agreement between the parties with
respect to the subject matter hereof and supersedes all prior arrangements and
understandings, both written and oral, expressed or implied, with respect
thereto.
11. This Agreement will be governed by and construed in accordance with
the laws of the State of Maryland.
12. This Agreement is binding upon and inures to the benefit of the
parties and their respective successors and assigns.
13. This Agreement may be executed in one or more counterparts, all of
which shall be considered one and the same agreement and shall become effective
when one or more counterparts have been signed by each of the parties and
delivered to the other parties, it being understood that all parties need not
sign the same counterpart. The parties agree that a fax signature is sufficient
to bind the parties to this Agreement.
[Signature on following page]
<PAGE>
EXECUTED ON April 28, 1997
FISERV FEDERAL SYSTEMS, INC.
By: /s/ Steve L. Komar
-------------------------------
Name: Steve L. Komar
Title: Chairman
ZMAX CORPORATION
By: /s/ Michael C. Higgins
-------------------------------
Michael C. Higgins
President
<PAGE>
EXHIBIT 10.19
AGREEMENT
---------
This AGREEMENT is made as of May 20, 1997 by and between ZMAX Corporation,
a Nevada corporation (the "Company"), and Investor Communications Company, LLC,
a Maryland limited liability company (the "Consultant").
RECITALS
The Company and the Consultant are parties to an Investor Relations
Consulting Agreement dated September 20, 1996 (the "ICC Agreement").
The Company and the Consultant desire to terminate the ICC Agreement and
to release each other from all further obligations and liabilities under the ICC
Agreement.
The Company is willing to give the Consultant, and the Consultant is
willing to accept, compensation in full for all services rendered under the ICC
Agreement subject to the terms and conditions set forth in this Agreement.
AGREEMENT
In consideration of the foregoing and the mutual promises and covenants
contained herein, the parties agree as follows:
1. Compensation for Prior Services Under ICC Agreement.
---------------------------------------------------
1.1 Compensation. Upon the execution of this Agreement, as compensation
------------
for bona fide services rendered by the Consultant not in connection with
---- ----
capital-raising transactions, the Company will cause 60,000 shares of the common
stock of the Company, par value $.001 (the "Consultant Shares"), to be issued in
the name of the Consultant as consideration in full for all services rendered by
the Consultant under the ICC Agreement through the effective date of this
Agreement.
1.2 Acknowledgment. The Consultant acknowledges and agrees that the
--------------
Consultant Shares constitute full and complete payment for all services and any
costs and expenses incurred by the Consultant under the ICC Agreement and hereby
releases the Company from payment of any amounts due or owing under the ICC
Agreement, other than any reasonable expenses incurred by the Consultant on
behalf of the Company through the effective date of this Agreement. Such
additional expenses will be paid by the Company within 30 days of receipt of the
Consultant's invoice for such amounts, together with supporting documentation
therefor.
2. Termination of ICC Agreement.
----------------------------
2.1 Termination. The parties agree that, upon the execution of this
-----------
Agreement, the ICC Agreement is terminated and neither party will have any
further obligation or liability to the other party under the terms thereof.
<PAGE>
2.2 Release by Consultant. The Consultant, and all of its affiliates,
---------------------
successors and assigns, for and in consideration of the compensation made in
accordance with Section 1 above, the receipt and adequacy of which is hereby
acknowledged, hereby waives all of its rights by virtue of or under the ICC
Agreement and further releases and discharges the Company from each and every
claim, debt, sum of money, agreement, obligation, promise, damage, compensation
and claims or demands whatsoever to the Consultant in connection with the ICC
Agreement or that the Consultant had, has, or may hereinafter have in connection
with the ICC Agreement.
2.3 Release by Company. The Company, and all of its affiliates,
------------------
successors and assigns, for and in consideration of the mutual releases
contained herein, hereby waives all of its rights by virtue of or under the ICC
Agreement and further releases and discharges the Consultant from each and every
claim, debt, sum of money, agreement, obligation, promise, damage, compensation
and claims or demands whatsoever to the Company in connection with the ICC
Agreement or that the Company had, has, or may hereinafter have in connection
with the ICC Agreement.
3. Representations and Warranties.
------------------------------
3.1 Authority. The Consultant represents and warrants it has the
---------
requisite power and authority to execute and deliver this Agreement and to
consummate the transactions contemplated hereby. This Agreement has been duly
executed and delivered by the Consultant and constitutes a valid and binding
agreement of the Consultant and is enforceable against the Consultant in
accordance with its terms.
3.2 Suitability of Investment. In connection with the Consultant's
-------------------------
acquiring the Consultant Shares pursuant to Section 1 of this Agreement, the
Consultant represents and warrants as follows:
(a) The Consultant understands and agrees that the Consultant
Shares have not been registered under the United States Securities Act of 1933,
as amended (the "Securities Act"), or any other securities statute or regulation
of the United States, or with any agency regulating the sale of securities of
any state or any other federal or state authority, nor has any official charged
with the administration of federal or any state securities laws reviewed the
Agreement or passed on or endorsed the merits of the transactions contemplated
by this Agreement.
(b) The Consultant has not and will not, directly or indirectly,
offer, sell, transfer, assign, exchange, or otherwise dispose of all or any part
of the Consultant Shares unless: (i) such Consultant Shares are registered under
the Securities Act and applicable state securities laws; (ii) exemptions from
such registration requirements are available; (iii) such requirements are not
applicable; or (iv) any disposition of the Consultant Shares is made 90 days or
more after the Company becomes subject to the reporting requirements of Section
13 or Section 15(d) of the United States Securities and Exchange Act of 1934, as
amended (the "Exchange Act"). The Consultant will not transfer any Consultant
Shares unless, in the opinion of counsel to the Company, one or more of the
conditions in this subparagraph (b) have been met and the transfer otherwise
complies with all applicable laws.
(c) The Consultant has provided bona fide services to the Company
---- ----
under the ICC Agreement not in connection with capital raising transactions in
consideration for the Consultant Shares.
-2-
<PAGE>
(d) The Consultant acknowledges and understands that an investment
in the Company is speculative in nature and involves a high degree of risk. The
Consultant further acknowledges and agrees that the Consultant has been afforded
access to such business and financial information regarding the Company as the
Consultant has deemed appropriate in order to make an informed investment
decision to hold the Consultant Shares and has been given the opportunity to ask
questions of, and receive answers from, the officers and other employees of the
Company relating to all aspects of the Company and its business, and all such
questions have been answered to the full satisfaction of the Consultant, and the
Consultant has otherwise had the opportunity to obtain from the Company and from
publicly available documents any and all information necessary to verify the
accuracy of any information so provided. The Consultant has relied solely on the
information it has received from such investigation in making its investment
decision and has not relied on projections or other forward-looking information
provided by the Company in making such decision.
(e) The Consultant's principal place of business is in the State
of Maryland. Mark Elenowitz owns, directly or indirectly, all of the equity
interest in the Consultant.
(f) The Consultant has an adequate net worth and means to provide
for its current needs and contingencies and is able at this time and in the
foreseeable future to bear the economic risk of a total loss of its investment
in the Company.
4. Indemnification. The Consultant understands and agrees that the
---------------
Consultant Shares are being offered and sold to it in reliance on specific
exemptions from, or non-applicability of, the registration requirements of the
United States federal and state securities laws and that the Company and its
officers, directors, employees, agents, and affiliates are relying on the truth
and accuracy of the representations, warranties and agreements, acknowledgements
and understandings of the Consultant to determine the applicability of such
exemptions and the suitability of the Consultant to acquire the Consultant
Shares. The Consultant further acknowledges and agrees that it understands the
meaning and legal consequences of the representations and warranties in Section
3 herein, and hereby agrees to indemnify and hold harmless the Company and its
officers, directors, employees, agents, and affiliates from and against any and
all liability, loss, damage, cost, or expenses (including, without limitation,
reasonable attorneys' fees) due to or arising out of a breach of any such
representations or warranties or any failure to fulfill any covenants or
agreements contained in this Agreement. All representations and warranties
contained in this Agreement and the indemnification contained in this Section 4
shall survive the execution and delivery of this Agreement and the issuance of
the Consultant Shares.
5. Notices. Any notices required or permitted under this Agreement
-------
shall be in writing and delivered in person, sent by facsimile, or sent by
registered or certified mail, return receipt requested, with proper postage
affixed, to the a party at the following address, or any notified change
thereto:
If to the Company: ZMAX Corporation
20251 Century Boulevard
Germantown, Maryland 20874
Telephone: (301) 353-9500
Fax: (301) 353-9501
Attention: President
-3-
<PAGE>
If to the Consultant: Investor Communications Company, LLC
4520 East West Highway
Suite 106
Bethesda, Maryland 20814
Telephone: (301) 215-6343
Fax: (301) 215-6347
Attention: Mark Elenowitz
All notices will be effective upon receipt or refusal of receipt.
6. Assignment. This Agreement, and the rights and obligations of the
----------
Company under the provisions hereof, may not be assigned by either party, except
that the Company may assign this agreement to any successor in interest of the
Company by merger, consolidation or otherwise.
7. Successors and Assigns. This Agreement shall be binding upon the
----------------------
successors, permitted assigns, and legal representatives of the parties hereto.
8. Severability. The invalidity or unenforceability of any provision
------------
of this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, and this Agreement shall be construed and carried
out as nearly as possible according to its original terms and intent.
9. Waiver. The failure or delay of either party to exercise any of
------
the rights or remedies provided herein will not operate as a waiver thereof; nor
will any waiver by either party of any breach of this Agreement operate as a
waiver of any other or subsequent breach. No provision of this Agreement may be
waived except in a writing signed by the party granting such waiver.
10. Governing Law. This Agreement and all amendments, modifications,
-------------
alterations or supplements hereto shall be governed by, and construed in
accordance with, the laws applicable in the State of Maryland, without reference
to the principles thereof regarding conflicts of law. Each of the parties
hereto agrees to submit to the jurisdiction of the state courts and, to the
extent jurisdiction can be obtained, U.S. federal district courts sitting in the
State of Maryland.
11. Entire Agreement; Amendment. This Agreement constitutes the entire
---------------------------
and exclusive understanding and agreement of the parties regarding the subject
matter addressed herein. No amendment or modification of this Agreement will be
valid or binding upon the parties unless made in writing and signed by both
parties hereto. All prior understandings and agreements, whether written or
oral, relating to the subject matter of this Agreement, including, without
limitation, the ICC Agreement, are hereby expressly superseded.
[SIGNATURES ON FOLLOWING PAGE]
-4-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
set forth above.
INVESTOR COMMUNICATIONS COMPANY ZMAX CORPORATION
By: /s/ Mark Elenowitz By: /s/ Michael C. Higgins
------------------------- --------------------------
Mark Elenowitz Michael C. Higgins
President President
-5-
<PAGE>
EXHIBIT 10.20
INVESTOR RELATIONS CONSULTING AGREEMENT
---------------------------------------
This INVESTOR RELATIONS CONSULTING AGREEMENT (this "Agreement") is made as
of May 20, 1997 by and between ZMAX Corporation, a Nevada corporation (the
"Company"), and Investor Communications Company, LLC, a Maryland limited
liability company (the "Consultant").
RECITALS
The Consultant is in the business of providing certain consulting and
educational services to companies in connection with investor relations and
communications.
The Company desires to engage the Consultant to provide it and its
affiliates with such services on the terms and conditions set forth in this
Agreement.
AGREEMENT
1. Engagement of Consultant. The Company agrees to engage the
------------------------
Consultant, and the Consultant accepts such engagement by the Company, on the
terms and conditions set forth in this Agreement.
2. Investor Relations Services.
---------------------------
2.1 Services. The Consultant agrees to perform for the Company and its
--------
affiliates certain investor relations services, including providing stock price
information upon request, responding to investor, potential investor, and broker
inquiries, developing logos, other corporate identity materials, and investor
communications materials, monitoring and notifying the Company of any articles
or releases in the press regarding the Company and its affiliates or the "Year
2000" date conversion business and/or issues generally, and providing other
information and assistance as requested by the Company or its affiliates from
time to time (the "Services"). The Consultant will not, without the express
prior consent of the Company, contact on behalf of the Company or any affiliate,
or provide any information regarding the Company or any affiliate to any
individuals connected in any manner, directly or indirectly, to the financial
media or the national press. The Consultant will report to the President of the
Company any and all requests for information regarding the Company or any
affiliate from the media and will not provide any responses to such requests
other than offering no comment, except as otherwise directed by the Company.
The Consultant agrees to devote such time as is necessary for satisfactory
completion of the work required to perform the Services and to ensure that only
the most recent and accurate information as provided by the Company and/or its
affiliates or made available to the Consultant is used in performing the
Services. Consultant will at all times perform the Services to the best of
Consultant's abilities and in a professional and workmanlike manner.
2.2 Company Approval. The Consultant agrees that any and all educational
----------------
material and any releases regarding the Company or any affiliate (collectively
"Releases") are subject to the prior review and approval of the Company in its
sole discretion. The Consultant shall submit a final draft of any Release to
the attention of the Company's President as well as a copy of such final draft
to counsel for the Company as soon as practicable prior to the anticipated date
of distribution of such
<PAGE>
Release. The Company will use reasonable efforts to notify the Consultant of
its acceptance or rejection of each Release, provided, however that if the
-------- -------
Company does not contact the Consultant prior to the proposed date of
distribution of the Release, such Release will be deemed rejected and may not be
used, published or disseminated by the Consultant in any way.
2.3 Ownership of Company Materials. The Consultant agrees that any and
------------------------------
all materials, including without limitation, Releases (in draft or final), any
logo, other corporate identity materials, investor marketing materials, and all
other information compiled, created or developed by the Consultant pursuant to
this Agreement and/or that include or make any reference to the name or business
of the Company or of any affiliate (collectively "Company Materials") are works
made for hire and shall be the sole and exclusive property of the Company, and
the Consultant hereby irrevocably assigns, and agrees to assign, to the Company
all right, title and interest that Consultant may have in and to all such
Company Materials. The Consultant agrees to execute any and all further
documents, agreements, instruments, certificates, and other writings to effect
any such assignment and to otherwise cooperate with the Company to protect and
assure the Company's right, title and interest in all such Company Materials.
2.4 Consultation and Reporting. The Consultant will make a representative
--------------------------
of the Consultant available at the request of the Company to (i) attend any
meeting of the Board of Directors of the Company, (ii) consult with the members
of the Board of Directors, officers of the Company and/or counsel to the
Company, and (iii) provide written reports regarding any matter or the
Consultant's general performance under this Agreement as reasonably requested by
the Company.
3. Compensation.
------------
3.1 Amount and Payment. In consideration of the Services performed by the
------------------
Consultant, the Company will pay the Consultant compensation on a fee for
service basis in the amounts and at such times as set forth on Exhibit A. Any
---------
increase in any amount of compensation must have the prior written approval of
the President of the Company and will be documented by both parties signing an
amended Exhibit A that will be attached to this Agreement.
---------
3.2 Affiliate Specific Service Fee. The parties contemplate that the
------------------------------
Company may request, from time to time, that the Consultant prepare or provide
corporate brochures, technical writing assistance, logo design, direct routing
e-mail set up and other Services specifically for an affiliate of the Company
and not in combination with Services being provided to the Company or the
preparation of Company materials ("Affiliate Specific Services"). The
Consultant and the Company will agree in advance on the fees to be paid to the
Consultant for the Affiliate Specific Services, which fees will be payable
within 30 days of receipt of the Consultant's invoice for such amounts, together
with reasonable supporting documentation therefor.
3.3 Expenses. Unless specifically authorized in writing by the President
--------
of the Company, the Consultant shall bear all of his own expenses incurred in
performing the Services and Affiliate Specific Services, including, without
limitation, rent, management, clerical help, general overhead and internal
costs, supplies and similar expenses. The Company will authorize only
reimbursement of reasonable out-of-pocket expenses for charges incurred by the
Consultant on behalf of the Company, including, without limitation, long
distance telephone charges, large job fax dissemination charges, cellular phone
charges, website fees, printing or special job copying fees, and costs and
expenses incurred by the Consultant in connection with coach travel more than 50
miles from the
-2-
<PAGE>
Consultant's principal offices and entertainment which is necessary to perform
the Services and the Affiliate Specific Services. All costs and expenses in
excess of $250 and all costs and expenses associated with travel and
entertainment must be pre-approved in writing by the President of the Company in
order to be reimbursable to the Consultant by the Company. All expenses will be
paid by the Company within 30 days of receipt of the Consultant's invoice for
such amounts, together with reasonable supporting documentation therefor.
4. Representations and Warranties.
------------------------------
4.1 Ability of Consultant. The Consultant represents and warrants that it
---------------------
has the ability to carry out the obligations assumed by it under this Agreement
and has obtained and will maintain in good standing all required permits,
licenses and regulatory approvals necessary or advisable in order to carry out
the Services.
4.2 Compliance. The Consultant represents and warrants that the
----------
Consultant's performance of this Agreement in accordance with its terms will not
breach any obligation by which Consultant is bound or be in violation of any
applicable law, rule or regulation, and that Consultant will comply with all
such applicable laws, rules and regulations, including without limitation all
applicable securities laws.
4.3 No Other Agreements. The Consultant agrees not to enter into any
-------------------
agreement that will conflict with this Agreement or prevent the Consultant's
good faith performance of the terms hereof.
5. Confidentiality.
---------------
5.1 The Company and the Consultant acknowledge that the Company may
disclose to the Consultant certain confidential information of the Company or
its affiliates ("Confidential Information") as the Company, in its sole
discretion, determines is necessary to assist the Consultant in the performance
of the Services. Such Confidential Information may include, without limitation,
financial information and data such as budgets, pricing, accounting, financial
projections or sources of financing, business plans and opportunities, project
descriptions, market or marketing information, technical or product information,
personnel information, information on suppliers, customers, clients, or other
actual or prospective business relationships, including potential investors,
information regarding property, methods of operation, and any other information
disclosed to the Consultant by the Company or any affiliate of the Company. In
addition, any information disclosed to the Company by a third party which the
Company is required to keep confidential is included within the meaning of
Confidential Information. For purposes of this Agreement, any information
which, directly or indirectly, is derived from or developed by the Consultant
(either solely or jointly with others at the Company or at any affiliate of the
Company) using any Confidential Information, or on behalf of the Company or any
affiliate, shall be included within the meaning of Confidential Information.
The Consultant acknowledges and agrees that the Confidential Information
represents confidential and proprietary information of the Company, and that the
Company derives significant benefit and goodwill from, among other things, the
Company and its consultants keeping such information confidential. It is
understood that such Confidential Information will remain the sole and exclusive
property of the Company, and that the Consultant will have no interest therein
or rights with respect thereto.
-3-
<PAGE>
5.2 The Consultant agrees that it will hold the Confidential Information
in strict confidence and will not use, reproduce, disclose or otherwise
disseminate the Confidential Information for the Consultant's own benefit or for
the benefit of others, or for any purpose other than performance of the Services
in accordance with the terms of this Agreement. The Consultant further agrees
not to take any action causing, or fail to take the action necessary in order to
prevent, any Confidential Information disclosed to or developed by the
Consultant to lose its character, or cease to qualify, as Confidential
Information.
5.3 The Consultant may disclose Confidential Information as necessary to
such employees or agents (collectively, "Representatives") of Consultant (i) who
require such information in order to assist the Consultant directly in
performing the Services and only to the extent of such requirement, and (ii)
whom Consultant has informed of the confidentiality, non-disclosure and
exclusivity obligations of this Agreement. The Consultant will diligently
monitor and enforce each such Representative's compliance with the terms of this
Agreement, and, upon the request of the Company, will promptly furnish to the
Company a list of all individuals who have had access to the Confidential
Information. Notwithstanding the foregoing, the Consultant agrees to be
responsible for any breach of this Agreement by any of the Consultant's
Representatives.
5.4 It is understood, and the Consultant agrees, that the obligations
imposed under this Section 5 will survive the termination, for any reason
whatsoever, of this Agreement.
6. Exclusivity.
-----------
6.1 The Consultant agrees that because of the confidential and sensitive
nature of the Confidential Information and the access to and special knowledge
of affairs and operations of the Company and its affiliates that the Consultant
and/or its Representatives will have as a result of its relationship with the
Company under this Agreement, the Consultant will not (except with the prior
written consent of the Company), during the term of this Agreement, engage,
directly or indirectly, on the Consultant's own behalf or in the service of or
on behalf of others, in any work or services similar to the Services for any
enterprise or entity engaged in the Year 2000 date conversion business. The
Company and the Consultant hereby acknowledge and agree that the Consultant's
compliance with this provision would not prevent the Consultant from earning a
reasonable livelihood since the Consultant's experience and capabilities are
such that the Consultant is able to engage in business activities that are not
restricted by this Agreement.
7. Relationship of the Parties. The Company and the Consultant
---------------------------
acknowledge and agree that Consultant is an independent contractor, and that
this Agreement does not constitute or appoint Consultant as a partner, employee
or agent of the Company and that the Consultant has no authority to bind the
Company in any way.
8. Indemnification.
---------------
8.1 Indemnification By Consultant. The Consultant agrees to indemnify the
-----------------------------
Company from and hold it harmless against any loss, liability, damage, action,
cause of action, cost or expense (including, without limitation, all attorneys'
fees) arising out of: (i) any unauthorized act or omission of the Consultant
which may be determined to be binding upon the Company; (ii) any breach by the
Consultant or its Representatives of any of the provisions of this Agreement; or
(iii) the gross negligence, recklessness or willful misconduct of the Consultant
or any of its Representatives.
-4-
<PAGE>
8.2 Indemnification by Company. The Company agrees to indemnify the
--------------------------
Consultant from and hold it harmless against any loss, liability, damage,
action, cause of action, cost or expense (including, without limitation, all
attorneys' fees) incurred by the Consultant arising out of a claim against the
Consultant regarding information given to the Consultant by the Company that is
determined to be incorrect due to the gross negligence or willful misconduct of
the Company.
9. Remedies. By virtue of the duties, responsibilities and special
--------
knowledge of the affairs and operations of the Company that the Consultant will
have as a result of its relationship with the Company under this Agreement, the
Consultant acknowledges that great loss and irreparable harm would be suffered
by the Company if the Consultant or any of its Representatives should breach or
violate any of the covenants contained in this Agreement, and that money damages
alone would be an inadequate remedy for such loss and harm. The parties agree
that each such covenant is reasonable and necessary to protect the interests of
the Company. Therefore, the Company will be entitled, in addition to any other
remedies available at law or in equity, to equitable relief in the form of a
restraining order, injunction, and any other similar remedy in order to prevent
a breach or threatened breach of the provisions of this Agreement, without the
need to post a bond or other security. The existence of any claim of the
Consultant against the Company shall not constitute a defense to the enforcement
by the Company of the covenants contained in this Agreement.
10. Term; Renewal and Termination
-----------------------------
10.1 This Agreement will commence as of the date set forth above and
remain in effect until May 19, 1998, unless sooner terminated in accordance with
this Section 10. The parties may extend the term of this Agreement for
additional one-year periods by providing written notice and mutually agreeing
upon the renewal of this Agreement prior to any expiration of this Agreement.
Any changes to this Agreement upon renewal will be documented in writing and
signed by an authorized representative of each of the parties.
10.2 Either party may terminate this Agreement at any time prior to its
expiration by giving not less than 30 days prior written notice to the other
party.
10.3 Notwithstanding the above, the Company may terminate this Agreement
immediately for: (i) fraud, dishonesty, gross negligence or willful misconduct
by the Consultant or any of its Representatives in connection with the
performance of the Services; (ii) failure by the Consultant to perform any
covenant or obligation under this Agreement that is not cured to the Company's
satisfaction within 5 days of notice to the Consultant identifying the failure;
(iii) breach by the Consultant or any of its Representatives of any other
obligation under this Agreement; or (iv) conviction of the Consultant of a crime
punishable by imprisonment.
10.4 Upon expiration or termination of this Agreement, all rights and
obligations of the parties towards each other shall cease and terminate, except
that (i) the Company shall promptly pay to the Consultant all accrued fees and
expenses due under the terms of this Agreement to the Consultant through the
date of termination, and (ii) the provisions of Sections 5, 8, 9, and 10 of this
Agreement shall survive the expiration or termination, for any reason
whatsoever, of this Agreement. Upon expiration or termination of this
Agreement, the Consultant will promptly return to the Company any and all
Confidential Information, Company Materials, drafts, Releases, and any other
materials and information and all copies thereof, in whatever form, to the
Company and deliver to
-5-
<PAGE>
the Company a certificate executed by an authorized representative of the
Consultant certifying that all such items in the Consultant's possession have
been delivered to the Company.
11. Notices. Any notices required or permitted under this Agreement shall
-------
be in writing and delivered in person, sent by facsimile, or sent by registered
or certified mail, return receipt requested, with proper postage affixed, to a
party at the following address, or any notified change thereto:
If to the Company: ZMAX Corporation
20251 Century Boulevard
Germantown, Maryland 20874
Telephone: (301) 353-9500
Fax: (301) 353-9501
Attention: President
If to the Consultant: Investor Communications Company, LLC
4520 East West Highway
Suite 106
Bethesda, Maryland 20814
Telephone: (301) 215-6343
Fax: (301) 215-6347
Attention: Mark Elenowitz
All notices will be effective upon receipt or refusal of receipt.
12. Assignment. This Agreement, and the rights and obligations of the
----------
Company under the provisions hereof, may not be assigned by either party hereto,
except that the Company may assign this Agreement to any successor in interest
of the Company, whether by merger, consolidation or otherwise. This Agreement
will inure to the benefit of, will be binding upon, and will be enforceable by
the parties hereto and any assignee of the Company. This Agreement and the
rights and obligations of the Consultant under the provisions hereof are
personal to the Consultant and may not be assigned by the Consultant.
13. Severability. The invalidity or unenforceability of any provision of
------------
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, and this Agreement shall be construed and carried
out as nearly as possible according to its original terms and intent.
14. Waiver. The failure or delay of either party to exercise any of the
------
rights or remedies provided herein will not operate as a waiver thereof; nor
will any waiver by either party of any breach of this Agreement operate as a
waiver of any other or subsequent breach. No provision of this Agreement may be
waived except in a writing signed by the party granting such waiver.
15. Governing Law. This Agreement and all amendments, modifications,
-------------
alterations or supplements hereto shall be governed by, and construed in
accordance with, the laws applicable in the State of Maryland, without reference
to the principles thereof regarding conflicts of law. Each of the
-6-
<PAGE>
parties hereto agrees to submit to the jurisdiction of the state courts and, to
the extent jurisdiction can be obtained, U.S. federal district courts sitting in
the State of Maryland.
16. Entire Agreement; Amendment. This Agreement and all Exhibits and
---------------------------
supplements attached hereto constitute the entire and exclusive understanding
and agreement of the parties regarding the subject matter addressed herein. No
amendment or modification of this Agreement will be valid or binding upon the
parties unless made in writing and signed by both parties hereto. All prior
understandings and agreements, whether written or oral, relating to the subject
matter of this Agreement, including, without limitation, the ICC Agreement, are
hereby expressly terminated.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
set forth above.
INVESTOR COMMUNICATIONS COMPANY ZMAX CORPORATION
By: /s/ Mark Elenowitz By: /s/ Michael C. Higgins
-------------------------- ----------------------------
Mark Elenowitz Michael C. Higgins
President President
-7-
<PAGE>
Exhibit A
---------
Fee Schedule
------------
From May 20, 1996 through August 20, 1996 the fee for the Services will be
$10,000 per month, payable on or before the 10th business day of each month.
The fee will be prorated for any partial month during this period. Thereafter
the fee for the Services will be such amount as may be agreed to by the parties
and documented by an amendment to this Exhibit A signed by both parties.
-8-
<PAGE>
EXHIBIT 11.1
ZMAX CORPORATION
EARNINGS PER SHARE
CALCULATION OF WEIGHTED-AVERAGE SHARES OUTSTANDING
<TABLE>
<CAPTION>
1994 1995 1996
--------- ------- -------
<S> <C> <C> <C>
Common Stock.......................................... 1,766,106 971,875 962,500
--------- ------- -------
Weighted-Average Shares Outstanding................... 1,766,100 971,875 962,500
========= ======= =======
</TABLE>
<PAGE>
Exhibit 21.1
LIST OF SUBSIDIARIES OF ZMAX CORPORATION
----------------------------------------
Century Services, Inc.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
(and to all references to our Firm) included in or made a part of this
registration statement.
Arthur Andersen LLP
Washington, D.C.
June 20, 1997
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
(and to all references to our Firm) included in or made a part of this
registration statement.
Amisano Hanson
Chartered Accountants
Washington, D.C.
June 20, 1997
<PAGE>
Exhibit 23.5
CONSENT OF EDWARD YOURDON
-------------------------
I, Edward Yourdon, hereby consent to be named as a nominee for
election to the ZMAX Corporation Board of Directors in the
Registration Statement to be filed with the Securities and Exchange
Commission by ZMAX Corporation and New ZMAX Corporation.
EXECUTED on June 12, 1997.
/s/ Edward Yourdon
-------------------------------
Edward Yourdon
<PAGE>
EXHIBIT 10.7
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made on June 18, 1997, to
be effective as of April 17, 1997, between CENTURY SERVICES, INC., a Maryland
corporation (the "Company"), and Joseph Yeh, an individual resident of the State
of Maryland (the "Executive").
BACKGROUND:
The Executive desires to enter into employment with the Company and the
Company desires to employ the Executive.
In consideration of the employment of the Executive by the Company and the
mutual agreements stated below, the parties agree as follows:
STATEMENT OF TERMS:
SECTION 1
DUTIES OF EXECUTIVE
1.1 ENGAGEMENT. The Company employs the Executive, and the Executive
----------
accepts such employment with the Company, subject to the terms and conditions of
this Agreement.
1.2 DUTIES AND RESPONSIBILITIES OF EXECUTIVE. The Executive will be
----------------------------------------
employed as the Senior Vice President-Technology of the Company and will do and
perform all services and acts necessary or advisable to fulfill the duties of
Senior Vice President-Technology of the Company and will conduct and perform
such services and activities as may be determined from time to time by the chief
executive officer of the Company. The Executive will diligently follow and
implement all management policies and decisions of the Company. The Executive
agrees that he has a duty of loyalty to the Company and will not engage in, or
otherwise be interested in, directly or indirectly, any other business or
activity that would materially and adversely affect the Company's business or
the Executive's ability to perform his duties under this Agreement.
1.3 WORKING FACILITIES. The Company, at its expense, will furnish the
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Executive with such office space, office equipment, secretarial help and such
other facilities, equipment and services as the Company determines to be needed
or beneficial for the performance by the Executive of the duties contemplated
under this Agreement. It is anticipated that the Executive will provide
services at and have available for use the Company's facilities at its
headquarters location.
<PAGE>
SECTION 2
COMPENSATION
2.1 CASH COMPENSATION. For all services to be rendered by the Executive
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under this Agreement, Company will pay the Executive the following amounts,
which payment will be subject to withholdings for local, state and federal
taxes, social security, and other deductions required by law or the policies of
the Company, from time to time in effect:
(a) Base Salary. The Company will pay the Executive an annual gross
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salary (the "Base Salary") of $125,000. The Base Salary will be payable on
the Company's standard salary payment schedule for executive level
employees. The Executive will receive an annual increase in his rate of
Base Salary of ten percent (10%) effective on January 1 of each year
beginning on or after January 1, 1998.
(b) Bonus. For each of fiscal year 1997, 1998, and 1999, if the
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Executive remains an employee of the Company on the last day of such fiscal
year, Executive will be eligible to receive a bonus of 100 percent of Base
Salary if he achieves all performance criteria established by the
Compensation Committee of the Company. Each bonus will be payable as soon
as administratively feasible after the Company's audited financial
statements for the applicable fiscal year become available. The
performance criteria for fiscal year 1997 have been established as follows:
(1) if the Company attains gross revenues of at least $9 million as shown
in the Company's audited financial statements, the Executive will receive a
bonus of fifty percent (50%) of Base Salary, and in addition, (2) if the
Company attains net income before interest, taxes, and amortization (EBITA)
of $200,000 as shown in the Company's audited financial statements, the
Executive will receive an additional bonus of fifty percent (50%) of Base
Salary. Such bonus for 1997 will be payable fifty percent (50%) in cash
and fifty percent (50%) in shares of common stock, par value $.001, of the
Company ("Common Stock"). The number of shares of Common Stock the
Executive will receive pursuant to the bonus formula will be equal to (a)
the dollar amount of the bonus payable in the form of shares of Common
Stock divided by (b) the average trade price per share of Common Stock over
the last ten trading days of the fiscal year for which the shares of Common
Stock are granted. In the event the Executive does not achieve the
performance criteria, or any part thereof, for the fiscal year, the
Compensation Committee of the Company will have the authority and
discretion to award the bonus or any part thereof. For fiscal years 1998
and 1999, the Compensation Committee of the Company will, no later than 90
days after the beginning of the fiscal year, set new performance criteria
and establish the percentage of the bonus for such year to be paid in cash
or shares of Common Stock and will promptly communicate the performance
criteria and the payment percentages to the Executive, thereafter.
2.2 BUSINESS EXPENSES. The Executive will be entitled to be reimbursed
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for all reasonable and necessary expenses incurred by him in connection with the
performance of his duties of employment under this Agreement in accordance with
the policies of the Company. The Executive will, as a condition of any such
reimbursement, submit verification of the nature and amount of such expenses in
accordance with the reimbursement policies from time to time adopted by the
Company.
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