SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1997
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________
Commission file number 000-23967
ZMAX CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 52-2040275
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
20251 CENTURY BLVD. GERMANTOWN, MD 20874
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (301) 353-9500
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Former name, former address and former fiscal year, if changed since last
report.
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of March 26,
1998, 11,729,714 shares of common stock, $.001 par value per share.
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ZMAX CORPORATION
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INDEX
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Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 1997
(unaudited) and December 31, 1996 1
Consolidated Statements of Operations for the nine
months ended September 30, 1997 and 1996 (unaudited) 3
Consolidated Statements of Operations for the three
months ended September 30, 1997 and 1996 (unaudited) 4
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1997 and 1996 (unaudited) 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II. OTHER INFORMATION
Exhibits and Reports on Form 8-K 15
SIGNATURES 16
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<TABLE>
ZMAX CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
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(UNAUDITED)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,511,466 $ 4,842,169
Prepaid expenses and other assets 524,258 27,762
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Total current assets 2,035,724 4,869,931
Property, plant and equipment, net 286,936 20,871
Intangible assets, net 4,324,447 2,274,406
Deferred financing costs, net 1,038,270 1,426,834
Other assets 986,068 -
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Total assets $ 8,671,445 $ 8,592,042
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</TABLE>
The accompanying notes are an integral part of these balance sheets.
1
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<TABLE>
LIABILITIES & SHAREHOLDERS' EQUITY
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
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(UNAUDITED)
CURRENT LIABILITIES:
<S> <C> <C>
Accounts payable and accrued expenses $ 1,618,343 $ 370,175
Customer deposits 1,000,000 -
Convertible notes - 1,508,592
Current portion of long-term debt 539,541 265,630
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Total current liabilities 3,157,884 2,144,397
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Convertible exchangeable subordinated debentures 5,500,000 5,500,000
Long-term debt, net of current portion - 527,857
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Total liabilities 8,657,884 8,172,254
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Commitments and contingencies (Notes 5 and 6)
Stockholders' 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,
7,000,079 and 9,450,514 shares issued and
outstanding as of September 30, 1997 and
December 31, 1996, respectively, 775,808
and 479,801 shares subject to cancellation
agreements as of September 30, 1997 and
December 31, 1996, ,
respectively (Note 4) 9,450 7,000
Additional paid-in capital 17,108,061 6,724,964
Issuable common stock, 904,365 as of December
31, 1996 - 5,299,579
Receivable for stock subscription - (105,000)
Accumulated deficit (17,103,950) (11,506,755)
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Total stockholders' equity 13,561 419,788
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Total liabilities and stockholders' equity $ 8,671,445 $ 8,592,042
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</TABLE>
The accompanying notes are an integral part of these balance sheets.
2
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<TABLE>
ZMAX CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Nine Months Nine Months
Ended 9/30/97 Ended 9/30/96
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(Unaudited) (Unaudited)
<S> <C> <C>
Revenues $ 512,041 $ -
Operating expenses:
Cost of revenues 283,332 -
Sales and marketing 896,464 45,922
General and administrative 3,069,598 135,051
Amortization and depreciation 651,937 78,490
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Loss from operations (4,389,290) (259,463)
Other Income (expense):
Interest income 121,893 -
Interest expense (1,228,695) -
Other (101,103) -
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Net loss before benefit for income taxes (5,597,195) (259,463)
Benefit for income taxes 0 -
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Net loss $ (5,597,195) $ (259,463)
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Net loss per share $ (1.10) $ (0.65)
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Weighted average shares outstanding 5,079,169 400,000
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</TABLE>
The accompanying notes are an integral part of these statements.
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ZMAX CORPORATION AND SUBSIDIARY
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
Three Months Three Months
Ended 9/30/97 Ended 9/30/96
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(Unaudited) (Unaudited)
<S> <C> <C>
Revenues $ 451,291 $ -
Operating Expenses:
Cost of revenues 226,188 -
Sales and marketing 243,315 45,922
General and administrative 875,043 51,574
Amortization and depreciation 280,284 47,094
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Loss from operations (1,173,539) (144,590)
Other Income (expense):
Interest income 13,805 -
Interest expense (188,008) -
Other (879) -
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Net loss before benefit for income taxes (1,348,621) (144,590)
Benefit for income taxes - -
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Net loss $ (1,348,621) $ (144,590)
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Net loss per share $ (0.23) $ (0.36)
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Weighted average shares outstanding 5,978,973 400,000
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</TABLE>
The accompanying notes are an integral part of these statements.
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<TABLE>
ZMAX CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Nine Months Nine Months
Ended 9/30/97 Ended 9/30/96
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(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (5,597,195) $ (259,463)
Adjustments to reconcile loss to net cash
Depreciation and amortization expense 651,937 78,490
Amortization of deferred financing costs 388,564 -
Amortization of discount on Notes and Debentures 591,408 -
Expenses related to conversion of Debentures - -
Stock compensation expense 547,500 -
Non-cash interest expense on promissory note 8,904 -
Loss on conversion of promissory note 101,442 -
Changes in assets and liabilities
Prepaid expenses (496,496) -
Other assets (986,068) -
Accounts payable and accrued expenses 1,248,168 (65,826)
Customer deposits 1,000,000 -
Deferred income taxes - -
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Net cash used in operating activities (2,541,836) (246,799)
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Net cash used in investing activities:
Purchases of property (257,542) -
Purchases of investments - -
Purchases of software (767,379) (831,892)
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Net cash used in investing activities (1,024,921) (831,892)
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Net cash provided by financing activities:
Net proceeds from the issuance of common stock 105,000 -
Advances from joint venture and
ZMAX prior to CSI recapitalization - 560,000
Net borrowings (payments) on long-term
obligations 131,054 531,892
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Net cash provided by financing activities 236,054 1,091,892
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Net (decrease) increase in cash (3,330,703) 13,201
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Cash, beginning of period 4,842,169 -
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Cash, end of period $ 1,511,466 $ 13,201
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</TABLE>
The accompanying notes are an integral part of these statements.
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ZMAX CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION, ORGANIZATION, AND NATURE OF OPERATIONS:
BASIS OF PRESENTATION
The unaudited financial statements as of September 30, 1997, for the
nine months ended September 30, 1996 and 1997, and for the three months ended
September 30, 1996 and 1997 presented herein have been prepared by the Company
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. These financial statements should be read in
conjunction with the financial statements of ZMAX Corporation, as of December
31, 1997, and notes thereto included in the Registration Statement on Form S-4
(file no. 333-29833), as declared effective by the Securities and Exchange
Commission on November 3, 1997. 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 September 30, 1996 and 1997,
and for the nine months then ended. The results of operations for the three
and nine months ended September 30, 1997, are not necessarily indicative of
the results that may be expected for the year ended December 31, 1997.
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 of CSI by ZMAX 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 since November 6, 1996.
All significant intercompany amounts have been eliminated.
Prior to the three months ended September 30, 1997, ZMAX and its
subsidiary, CSI (collectively, the "Company"), were considered development
stage companies as defined by Statement of Financial Accounting Standards
("SFAS") No. 7, "Accounting and Reporting by Development Stage Enterprises."
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
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services to potential customers. Since the acquisition of CSI, the Company has
been focused on the computer software re-engineering market. Although the
Company generated its first revenues during 1997, the Company has no assurance
of future revenues. Even if marketing efforts are successful, substantial time
may pass before significant revenues and profitability may be realized and,
during this period, the Company may require additional funds that may not be
available to it.
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
customer's 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.
2. SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
Investments with original maturities of three months or less are
considered cash equivalents for purpose of these financial statements.
REVENUE RECOGNITION
Revenues on time-and-materials contracts are recognized based upon hours
incurred at contract rates plus direct costs. Revenues on fixed-price
contracts are recognized on the percentage-of-completion method based on costs
incurred in relation to total estimated costs. Anticipated losses are
recognized as soon as they become known.
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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.
NET LOSS PER SHARE
Net loss per share for the nine months ended September 30, 1997 and
1996, and the three months ended September 30, 1997 and 1996, are 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 are also not included.
3. DEBT AND DEFERRED FINANCING COSTS:
The following details the Company's debt obligations:
<TABLE>
<CAPTION>
September 30,
1997 December 31,
(Unaudited) 1996
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<S> <C> <C>
Promissory note payable to Fiserv, interest payable
annually at the prime rate plus 1%......................... $ - $ 385,000
Amounts due for the purchase of software rights,
interest imputed at 10%, due in installments of
$283,333 in January 1998 and May 1998...................... 539,541 408,487
Convertible notes, interest payable monthly at 8% - 1,508,592
Convertible exchangeable subordinated debentures,
interest payable semi-annually, at 8%,
due in December 1999....................................... 5,500,000 5,500,000
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Total................................................. 6,039,541 7,802,079
Less ---- Current portion...................................... (539,541) (1,774,222)
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$ 5,500,000 $ 6,027,857
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COMMON STOCK AND PREFERRED STOCK:
REVERSE STOCK SPLIT
Effective July 23, 1996, ZMAX effected a 1 for 80 reverse split of its
common stock. All share amounts and per share amounts have been restated to
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reflect this event.
STOCK SUBJECT TO CANCELLATION
By an agreement dated April 27, 1992, ZMAX agreed to acquire all of the
outstanding common stock of American Oil in consideration for the issuance of
625,000 shares of ZMAX common stock, 5,000,000 shares of ZMAX preferred stock
and the sale of an additional 88,266 shares of ZMAX common stock for $7,062 in
cash. The shares of ZMAX preferred stock were never issued and American Oil
did not undertake any business or any financial transaction other than the
acquisition of certain mining rights. American Oil's corporate status was
suspended by the State of Nevada as of December 1, 1995, and that subsidiary
was 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 ZMAX common stock. As of December 31, 1996, these shares had not
been returned to the Company for cancellation. In March 1997, 296,007 of these
shares were returned to the Company and canceled. An additional 479,801 shares
are subject to cancellation but had not been returned to the Company for
cancellation as of September 30, 1997.
5. RELATED PARTY TRANSACTIONS:
In connection with the recapitalization of CSI, a consultant to the
Company and his affiliate were issued an aggregate of 320,000 shares of
Company common stock for services related to the CSI transaction and related
financing. This individual and his affiliate received an aggregate of
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 to him $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. Through September 30, 1997, this
individual received $90,000 in consulting fees.
6. COMMITMENTS AND CONTINGENCIES:
LITIGATION
On April 17, 1997, Alan L.Levine and Canadian Petroleum Corporation
filed suit in the Third Judicial district Court of Salt Lake County, Utah
against the Company (f/k/a Mediterranean Oil Corp., f/k/a Pandora, Inc.) and
John Does. The complaint alleges various common law claims arising from the
alleged untimely failure to remove legends restricting the transferability of
shares of the Company's common stock that had been issued by the Company in
payment of legal fees incurred. The plaintiffs have computed damages in the
approximate amount of $87,000. The Company believes the complaint is without
legal merit and will vigorously defend itself.
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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.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and
results of operations of the company should be read in conjunction with the
financial statements and the notes thereto which appear elsewhere in this
quarterly report and its registration statement on Form S-4, for the year
ended December 31, 1996.
The information set forth below includes forward-looking statements.
Some factors that could cause results to differ materially from those
projected in the forward-looking statements are set forth below. Readers are
cautioned not to put undue reliance on forward-looking statements. The Company
disclaims any intent or obligation to update publicly these forward-looking
statements, whether as a result of new information, future events or
otherwise.
OVERVIEW
On November 6, 1996, ZMAX, a shell company listed on the NASD OTC
Bulletin Board acquired all of the outstanding stock of CSI. Prior to this
transaction, ZMAX had no operations and its activities consisted of efforts to
establish or acquire a new business and to raise capital. CSI was a privately
held company formed on December 13, 1995. 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. 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 the 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 .
Consequently, CSI's revenues and operating results are expected to be subject
to substantial variations in any given year and from quarter to quarter.
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 computer software 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
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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
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 expenses relates to property and equipment and
intangible 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.
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.
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 to six
non-U.S. accredited investors and financial institutions. The notes were due
in January and March of 1997 and were convertible, at the option of the
holder, into a total of 1,600,000 shares of Company common stock. 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 of
1,600,000 shares of ZMAX common stock (the "Note Conversions").
ISSUANCE OF FINDERS FEE SHARES. In connection with the CSI transaction
and related financing, ZMAX agreed to issued 320,000 shares of 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, ZMAX
also agreed to grant 350,000 shares of 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, ZMAX's promissory
note for $385,000. This promissory note has been converted into 32,077 shares
of ZMAX common stock issued to Fiserv, Inc. in May 1997.
ACQUISITION OF COCACT SOFTWARE. On April 30, 1997, 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 2000SM
solution. Conditions of the purchase agreement included a three month software
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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 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. The enhancements were completed and accepted by CSI in August 1997
and the 150,000 shares were issued to the seller in September 1997. The second
installment was paid in September 1997. The balance of the purchase price will
be paid in equal installments on January 1, 1998 and May 1, 1998.
RESULTS OF OPERATIONS
Prior to the third quarter of 1997, CSI was considered a development
stage company. CSI was formed on December 13, 1995 and 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 during this period. Included in the 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 nine months ended September 30, 1996, were a loss of
approximately $259,000, or $0.65 per share. The loss was primarily related to
the commencement of operations by CSI in early 1996. Results for the nine
months ended September 30, 1997, were a loss of approximately $5.6 million, or
$1.10 per share. 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 $636,000 in amortization of intangibles and deferred
financing costs was recorded. Approximately $547,000 in non-employee stock
compensation was charged to expense. The Company also recognized a loss of
approximately $101,000 upon the conversion of a promissory note into common
stock. The remaining loss reflects the costs related to the increased
operations of CSI. During the nine months ended September 30, 1997, the
Company recognized revenues totaling $512,041 related to the commencement of
several projects. Direct expenses related to the revenues totaled $283,332.
LIQUIDITY AND CAPITAL RESOURCES
Current assets at September 30, 1997, totaled approximately $2.0
million, a decrease of approximately $2.8 million from December 31, 1996,
attributable primarily to a decrease in cash that was used for operations, the
purchase of property and equipment, professional expenses associated with the
Debenture Exchange, and payment on the Company's long-term obligation related
to its purchase of the COCACT software tools. Current liabilities at September
30, 1997, totaled approximately $3.2 million an increase of approximately $1.0
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million from December 31, 1996, attributable primarily to a customer deposit
received in September 1997.
Prior to the CSI transaction, ZMAX sold 2,800,000 shares of its common
stock for $0.30 per share, or $840,000 in the aggregate, issued $1.5 million
of convertible notes for cash and issued $480,000 of convertible notes as
satisfaction for certain liabilities. The proceeds from such transactions were
used to satisfy certain liabilities of 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 Company common stock. In
December 1996, the Company issued $5.5 million in convertible exchangeable
subordinated debentures for cash. As of December 31, 1996 and September 30,
1997, the Company had approximately $4.8 million and $1.5 million in cash,
respectively. As of December 31, 1996 the Company had working capital of
approximately $2.7 million while at September 30, 1997, the Company had a
working deficit of $1.1 million. The change was primarily a result of the $3.3
million decrease in cash and cash equivalents and the $1.0 million customer
deposit received in September 1997.
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 and cash generated from
operations, together with the proceeds from the exchange of the debentures and
warrant exercises, which provided approximately $6.2 million in net proceeds
in December 1997, will be adequate to finance continuing operations,
investments in property and equipment, and expenditures for the development of
additional software improvements in the Company's VISION 2000SM toolset.
Over the longer term, the Company must successfully execute its plans to
generate significant positive cash flows if its is to sustain adequate
liquidity without impairing growth or requiring the infusion of additional
funds from external sources of cash. 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.
14
<PAGE>
PART II. OTHER INFORMATION
EXHIBIT AND REPORTS ON FORM 8-K
EXHIBITS
Exhibit 27 - Financial Data Schedule
REPORTS ON FORM 8-K
None
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ZMAX Corporation
Date: March 31, 1998 /s/MICHAEL C. HIGGINS
-----------------------------
Michael C. Higgins
President
/s/G.W. NORMAN WAREHAM
-----------------------------
G.W. Norman Wareham
Vice President -
Principal Financial Officer
/s/JAMES T. MCCUBBIN
-----------------------------
James T. McCubbin
Vice President -
Principal Accounting Officer
16
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