SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the fiscal year ended DECEMBER 31, 1997.
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.
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.001 PER SHARE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days: Yes [X] No [ ]
The aggregate market value of the registrant's Common Stock, par value $.001
per share, held as of March 26, 1998 by non-affiliates of the registrant was
approximately $ 64,737,493 based on the average bid and asked prices of the
Common Stock on such date.
As of March 30, 1998, the registrant had 11,729,714 shares of its Common
Stock issued and outstanding.
Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
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statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
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DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III of the Form 10-K is incorporated
by reference from the registrant's definitive proxy statement or amendment
hereto which will be filed not later than 120 days after the end of the fiscal
year covered by this report.
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ITEM 1. BUSINESS.
INTRODUCTION
ZMAX Corporation ("ZMAX" or the " Company") focuses on acquiring, building and
operating companies in the information technology industry. In 1996, the
Company acquired all of the stock of Century Services, Inc. ("CSI"), a
corporation which provides re-engineering and information processing services
to users of large-scale computer systems in North America. 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
total system solution, known as VISION 2000SM, encompasses a management
methodology, assembly-line processes, and a proprietary automated software
tool suite to identify and convert date-sensitive software applications to
Year 2000 compliance.
THE YEAR 2000 PROBLEM
Throughout most of the history of computer data processing by businesses
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
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 computer code developed by
a 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
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an organization's applications encountering dates after 1999 increases. As the
millennium draws nearer, more and more applications will be at risk.
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 governmental agencies upon
computer-based information systems makes it critical for those organizations
to assess and correct their Year 2000 problem. 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 5
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 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
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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.
Gartner Group, Inc., an information technology research firm, 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 Gartner Group, have suggested that the magnitude of the
Year 2000 problem--and the 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 after the Year 2000, to leverage its assets
(including its expertise, client relationships and detailed knowledge of its
clients' computer systems, applications and codes) obtained through providing
its millennium services to develop additional business opportunities in the
re-engineering and conversion industry and related areas to assist its clients
and other large business organizations and governmental agencies to update or
convert their older legacy computer systems into more modern systems to better
serve their needs. The Company's strategy for achieving these objectives
includes the following key elements:
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.
MAINTAIN TECHNOLOGICAL LEADERSHIP. The Company conducts research and
development activities in order to improve the functionality, flexibility,
ease of use and cost-effectiveness of its millennium solution. The Company
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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, to gather market
information, and to gain the necessary expertise to continually improve its
technology and services.
ACHIEVE MARKET PENETRATION THROUGH TEAMING ARRANGEMENTS. As a small
company, CSI has only limited resources to undertake marketing efforts. To
maximize its marketing impact, the Company has endeavored to team with
established strategic industry participants such as large software developers,
system integration companies, and systems manufacturers. The Company believes
that teaming arrangements can provide customers with superior, comprehensive
millennium conversion solutions. Teaming arrangements also provide the Company
the opportunity to enhance its internal marketing efforts by capitalizing on
the existing client relationships and ongoing sales and marketing efforts of
its strategic partners in various markets. To date, CSI has entered into
non-exclusive teaming arrangements with EDS Federal, Hewlett Packard, Hitachi
Data Systems, and First Technology Systems. Additionally, CSI has entered in
an exclusive arrangement to represent POV, an European company that
specializes in analysis and remediation of "IDEAL" code, in the North American
marketplace.
PENETRATE ADDITIONAL GEOGRAPHIC MARKETS. Initially, the Company has
targeted the North American 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 including
re-engineering and other 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 develop detailed knowledge of its clients' computer systems,
applications and codes. This will place the company in the best position to
assist its clients in the reengineering or conversion of their older legacy
computer systems and applications, as well as 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 software applications to Year 2000 compliance. VISION 2000SM
consists of two phases: Phase 1, Global Impact Analysis (GIA), and Phase 2,
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Conversion and Implementation (C&I). Each phase is further divided into 3
steps that are described below.
VISION 2000SM--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 2000SM 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 2000SM
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
2000SM Strategic Planner (described below) for schedule and resource planning.
The second step of the GIA phase is the Year 2000 date impact analysis.
VISION 2000SM 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 2000SM 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
2000SM 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.
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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
cannot certify the application is error free. Therefore, a test strategy must
be selected to maximize the end user's confidence in the expected success of
the conversion, demonstrate conversion quality and balance the cost of the
testing procedure versus the risk of performing a testing procedure which is
not broad enough.
All the information gathered during these three steps of the GIA is
entered into the VISION 2000SM 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.
VISION 2000SM--CONVERSION AND IMPLEMENTATION
The Company believes that its VISION 2000SM conversion and
implementation process is an integrated combination of effective, secure and
efficient automated software tools and methodologies working in concert and
designed to produce consistent, high quality conversion results. The VISION
2000SM Y2K Converter was designed and developed specifically for Year 2000
conversion tasks. The VISION 2000SM 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 2000SM 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.
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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 2000SM Baseline Inventory Control is designed to define the scope
of a Year 2000 project. VISION 2000SM Date Analyzer attempts to identify every
occurrence of date and date-related objects within an application system.
VISION 2000SM Date Converter works to apply consistent, rule-based conversion
that minimizes commission errors. The VISION 2000SM 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 2000SM, and will be automatically linked to the
Company's web site to obtain more detailed information on VISION 2000SM.
TRADE SHOWS. CSI has co-sponsored Year 2000 conferences and expositions
in concert with the Software Productivity Group in London, Toronto, New York
City, Chicago, San Francisco, and Boston. 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 and October 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 contract 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.
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JOINT MARKETING. The Company will seek joint marketing opportunities
with its alliance partners. To date, CSI has entered into non-exclusive
teaming arrangements with EDS Federal, Hewlett Packard, Hitachi Data Systems,
and First Technology Systems. Additionally, CSI has entered in exclusive
arrangements with POV, an European company that specializes in analysis and
remediation of "IDEAL" code. The Company believes that the marketing resources
of its alliance partners will add to the exposure and credibility of the
Company's VISION 2000SM 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:
DIRECT MARKETING. CSI implemented a mail-out campaign to over 300
financial institutions that was 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 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 2000SM 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.
TEAMING ARRANGEMENTS. CSI has entered into teaming arrangements 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
non-exclusive teaming arrangements with EDS Federal, Hewlett Packard, Hitachi
Data Systems and First Technology Solutions. Although the Company has not yet
received any clients through its teaming arrangements, the Company believes
that as the Year 2000 approaches, parties with teaming arrangements with the
Company will receive demand from their client base for Year 2000 compliance
support and may call on CSI to provide these services.
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CLIENTS
CSI has successfully performed Year 2000 assessment and conversion
pilots and projects for several large companies. In 1997, CSI entered into six
Year 2000 conversion services contracts with clients that included Lehman
Brothers Inc., Washington Gas Light Company, The Bessemer Group, Incorporated,
Wisconsin Power & Light Company, a financial services company and a Fortune
100 company. Three of these customers individually accounted for more than 10%
of the Company's revenues for 1997, but no single existing customer accounted
for more than 25% of revenues for the year ended December 31, 1997. CSI has
also submitted proposals as of the year end 1997 to provide its millennium and
other software re-engineering services to over 20 other companies in
telecommunications, financial services, utilities, health care, retail,
manufacturing and related industries in addition to state and federal
government agencies. All of these proposals are currently pending.
COMPETITION
The market for millennium services is highly competitive and will become
increasingly competitive as the Year 2000 approaches. 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. 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
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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
2000SM 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. Further, the Company
performs all of its conversion procedures within its controlled office
environments, thereby minimizing the potential for any third-party to copy or
replicate its software tools and VISION 2000SM solution. Despite these
precautions, it nevertheless 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.
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
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claim, any infringement claim or litigation against the Company could
therefore materially adversely affect the Company's business, operating
results, and financial condition.
PERSONNEL
As of December 31, 1997, the Company had 38 full-time employees
including 6 persons in Sales, 25 persons in Operations/Engineering and 7
persons in Management and Administration. The Company also employs temporary
employees and consultants.
ITEM 2. 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 was $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.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not involved in any material legal proceedings except
possible as described below. On April 17, 1997, Alan L. Levine and Canadian
Petroleum Corporation filed suit in the Third Judicicial District Court of
Salt Lake County, Utah against the Company (f/k/a Mediterranean Oil Corp.,
f/k/a Oryx Gold 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 transferablilty of shares of the Company's
common stock that had been issued by the Company in payment oflegal 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURTIY HOLDERS.
(A). On December 7, 1997, an Annual Meeting of Stockholders was held to
elect directors until the next annual meeting of stockholders, to approve the
Company's 1997 Stock Incentive Plan, and to approve and adopt an Agreement and
plan of Merger, dated as of June 10, 1997 between Old ZMAX and New ZMAX
Corporation, whereby the Company changed its state of incorporation from
Nevada to Delaware and reduced its indebtedness through the conversion of $5.5
14
<PAGE>
million of outstanding debentures into shares of Company Common Stock and
warrants to purchase additional shares of Company Common Stock.
(B). The following Directors were nominated and elected at such Annual
Meeting of Stockholders:
<TABLE>
<CAPTION>
Name Age
---- ---
<S> <C>
Michael Berty .............. 58
Michael C. Higgins ......... 53
G.W. Norman Wareham ........ 44
Steve L. Komar ............. 56
Robert H. Miller ........... 44
Ted Fine ................... 60
</TABLE>
(C). On December 7, 1997 the following events were approved: (i) The
aforementioned director's were elected to serve until the next annual meeting,
(ii) The 1997 Stock Incentive Plan was approved, (iii) and The Merger of Old
ZMAX and New ZMAX was approved. The following votes for the director's were
6,951,154 votes for, 2,343 votes against, and o abstained. The following votes
for the 1997 Stock Incentive Plan were 6,064,856 votes for, 14,118 votes
against, and 17,603 abstained. The following votes for the Merger were
6,079,019 votes for, 3,083 votes against, and 14,475 abstained.
ITEM 4a. EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth information regarding the Company's
current executive officers:
<TABLE>
<CAPTION>
Office With Appointed
Name Age the Company to Office
---- --- ----------- ---------
<S> <C> <C> <C>
Michael C. Higgins, CEO 53 President, Chief Executive 1996
Officer and Director
G.W.Norman Wareham 44 Vice President, Chief, 1996
Financial Officer,
Secretary and Treasurer
James T. McCubbin 34 Vice President, 1998
Assistant Secretary and
Assistant Treasurer
</TABLE>
MICHAEL C. HIGGINS has served as a Director and the President and Chief
Executive Officer of the Company since its merger with Old ZMAX in December
1997. Prior to that time, Mr. Higgins served as a Director and the President
of Old ZMAX from December 1996 to December 1997. Mr. Higgins also serves as a
15
<PAGE>
director and the President of CSI, a subsidiary of the Company. Mr. Higgins
co-founded CSI in December 1995. 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 2000SM proprietary
software 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. Degree in Engineering from the
United States Military Academy at West Point.
G.W. NORMAN WAREHAM has served as a Director and the Vice President and
Chief Financial Officer of the Company since its merger with Old ZMAX in
December 1997. Prior to that time, Mr. Wareham served as a director and the
Vice President and Chief Financial Officer of Old ZMAX from September 1996 to
December 1997. 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 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.
JAMES T. MCCUBBIN was appointed Vice President, Assistant Secretary and
Assistant Treasurer of ZMAX Corporation in Febuary 1998. Mr. McCubbin is also
Vice President - Chief Financial Officer, Secretary and Treasurer of CSI, a
subsidiary of the Company. He has been employed by CSI since February 1997 and
prior to that Mr. McCubbin was a consultant to CSI from December 1995 to
February 1997. From 1991 until February 1997, Mr. McCubbin was a financial
consultant for Marmac Investments, a venture capital and investment
organization. Mr. McCubbin holds a M.S. in International Management and a B.S.
in Finance from the University of Maryland.
16
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Company's Common Stock has been quoted on the NASD OTC Bulletin
Board 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 for a 1 for 80 reverse stock split of the Company's
Common Stock as of August 27, 1996, represent the high and low closing bid
prices of the Common Stock for each of the periods indicated:
<TABLE>
<CAPTION>
1997 HIGH LOW
-------------------------------------------------------
<S> <C> <C>
First Quarter $ 20.00 $ 10.00
Second Quarter 17.25 12.12
Third Quarter 15.50 12.25
Fourth Quarter 14.56 6.12
</TABLE>
<TABLE>
<CAPTION>
1996 HIGH LOW
-------------------------------------------------------
<S> <C> <C>
First Quarter $ 3.99 $ .80
Second Quarter 4.00 1.60
Third Quarter 6.75 1.25
Fourth Quarter 16.25 5.00
</TABLE>
As of March 26, 1998 there were 110 holders of record of the Common
Stock.
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock and
intends to continue this policy for the foreseeable future. ZMAX plans to
retain earnings for use in its business. Any future determination to pay cash
dividends will be at the discretion of the Board of Directors of the Company
and will be dependent on ZMAX's results of operations, financial condition,
contractual and legal restrictions and any other factors deemed to be
relevant.
17
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL INFORMATION.
The tables below presents selected historical financial data of ZMAX.
The ZMAX historical data for the years ended December 31, 1997 and 1996, and
for the period from December 13, 1995 (Date of Inception) to December 31, are
based on the historical financial statements of ZMAX Corporation as audited by
Arthur Andersen LLP, independent public accountants. The information set forth
below should be read in conjunction with, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the historical
financial statements and notes thereto included elsewhere herein. On November
6, 1996, ZMAX, a shell company listed on the NASD 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 acquiror (a
reverse acquisition). The historical financial statements prior the November
6, 1996 are those of CSI. The accompanying selected financial data 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, 1997.
18
<PAGE>
<TABLE>
<CAPTION>
For the Period
from December 13,
1995 (Date of
Inception) to
For the Year Ended December 31, December 31,
--------------------------------- ---------------
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues $ 1,425,360 $ - $ -
Cost of revenues 667,098 - -
Selling and marketing 1,110,655 228,803 -
General and administrative 4,148,421 1,069,681 -
Amortization and
Depreciation 1,008,864 193,533 -
--------------- --------------- ---------------
Loss from operations (5,509,678) (1,492,017) -
--------------- --------------- ---------------
Other income (expense):
Interest income 137,814 14,248 -
Interest expense (1,366,479) (7,125,386) -
Other (7,468,356) (2,903,600) -
Income tax benefit - - -
--------------- --------------- ---------------
Net loss $ (14,206,699) $ (11,506,755) -
=============== =============== ===============
Net loss per share $ (2.58) $ (13.45) $ -
=============== =============== ===============
Weighted average number
of common stock
shares outstanding 5,502,668 855,712
=============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents $6,405,084 4,842,169 -
Working capital (deficit) 5,262,151 2,725,534 (110,000)
Total assets 11,870,077 8,592,042 110,000
Total liabilities 2,291,697 8,172,254 110,000
Accumulated Deficit (25,713,454) (11,506,755)
Total stockholders' equity 9,578,380 419,788 -
</TABLE>
19
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
PRELIMINARY NOTES REGARDING FORWARD LOOKING STATEMENTS
The information set forth below includes forward-looking statements.
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 with its common stock listed
on the OTC Bulletin Board, acquired all of the outstanding stock of CSI. Prior
to that 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 by ZMAX of CSI 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 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
can be no assurance that the Company will be able to successfully expand its
20
<PAGE>
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 relate 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 upon time frame.
RECENT DEVELOPMENTS
CONVERSION OF $2.1 MILLION OF CONVERTIBLE 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 of the Company approved the conversion and, in
April 1997, all $2.1 million of convertible notes were converted into
aggregate of 1,600,000 shares of Company Common Stock (the "Note
Conversions").
ISSUANCE OF FINDERS FEE SHARES. In connection with the CSI transaction
and related financing, ZMAX agreed to issue 320,000 shares of Company 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 Company 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 was converted by Fiserv, Inc. in May
1997 into 32,077 shares of Company Common Stock.
ACQUISITION OF COCACT SOFTWARE. On April 30, 1997, ZMAX entered into an
agreement with Taiwan's Institute for Information Industry to purchase all
rights, title and interest to the Change of Century Analysis and Conversion
Tool (COCACT) software program, an integral part of CSI's VISION 2000SM
21
<PAGE>
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 was $1.1 million in
cash plus 150,000 shares of Company Common Stock issuable upon completion and
testing of certain COCACT enhancements 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 balance of
the purchase price will be paid in equal installments on January 1, 1998 and
May 1, 1998.
MERGER AND EXCHANGE OFFER. In November 1997, ZMAX merged (the "Merger")
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"). The purpose of the Merger was to change the state of
incorporation of the Company from Nevada to Delaware and cause the conversion
of its then outstanding 8% Convertible Exchangeable Subordinated Debentures
(the "Debentures") into shares of Company Common Stock and warrants to
purchase additional shares of Company Common Stock as described in further
detail below. At the time the Merger became effective (the "Effective Time"),
each outstanding share of common stock, $0.001 par value, of ZMAX was
converted into one share of common stock, $0.001 par value, of New ZMAX. New
ZMAX was the surviving corporation in the Merger, and CSI is thereby a wholly
owned subsidiary of New ZMAX. At the effective time of the Merger, the name of
New ZMAX was changed to "ZMAX Corporation" pursuant to the Merger Agreement.
In November 1997, the Company offered (the "Exchange Offer") to exchange
all, but not less than all, of the Debentures under the terms and conditions
described below. The Exchange Offer was accepted by all the Debenture holders,
and each Debenture holder received 220 shares of Company Common Stock and a
warrant to purchase an additional 220 shares of Company Common Stock (the
"Warrant Shares") per $1,000 principal amount of Debentures exchanged. In
December 1997, all $5.5 million in Debentures outstanding were exchanged for
1,210,000 shares of Company Common Stock and warrants to purchase a total of
1,210,000 shares of Company Common Stock. Any accrued but unpaid interest from
June 1, 1997, to the date of the exchange was waived by the Debenture holders.
Because the securities issued pursuant to the terms of the Exchange
Offer included securities in excess of the securities issuable pursuant to the
original conversion terms of the Debentures, the Company recognized $7,370,000
which has been recorded as other expense at the time of the exchange. The
expense recognized equaled the fair value of the incremental number of shares
of Company 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.
Concurrent with the Exchange Offer, warrants to purchase 1,069,200
shares of Company Common Stock were exercised by the holders thereof for
$7,484,000 in proceeds to the Company. Warrants to purchase 140,800 shares of
22
<PAGE>
Company Common Stock remain outstanding as of December 31, 1997.
Costs of $1,261,606 were incurred in completing the Exchange Offer.
These amounts have been reflected as a reduction to additional paid-in capital
in order to offset the proceeds of $7,484,400 related to the exercise of
warrants and the exchange of the Debentures into common stock.
RESULTS OF OPERATIONS
Prior to the CSI transaction, ZMAX was a development stage company whose
purpose was to obtain capital and to seek out, investigate, and acquire
interests in products, properties and business that may have had a potential
for profit. From the date of its inception (April 24, 1986) through December
31, 1995, ZMAX incurred a cumulative loss of $1.7 million. As of December 31,
1995, ZMAX had no assets and $1.4 million of liabilities.
For financial reporting purposes, the CSI transaction was treated as a
recapitalization of CSI with CSI as the acquiror (a reverse acquisition). The
historical financial statements including the results of operations prior to
November 6, 1996 are those of CSI.
CSI 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 during this period. Included in the loss were several significant
non-cash charges including approximately $2.9 million of expense related to
the ZMAX-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 year ended December 31, 1997, were a loss of $14.2
million, or $2.58 per share. The loss was primarily related to the further
re-capitalization of ZMAX and the development of operations and infrastructure
by CSI. Included in the loss were several significant non-cash charges
including approximately $7.4 million in other charges related to the exchange
of the Debentures, 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 $1.5 million in amortization of intangibles and
deferred financing costs was recorded, and 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 shares of Company Common Stock. The remaining loss
reflects the costs related to the increased operations of CSI and fees and
23
<PAGE>
expenses associated with the preparation of documents in connection with the
CSI transaction, the Note Conversions and the transactions contemplated
thereby. During the year ended December 31, 1997, the Company recognized
revenues totaling $1,425,360, related to the continued growth in projects that
the Company has been awarded. Direct expenses related to the revenues totaled
$667,098.
LIQUIDITY AND CAPITAL RESOURCES
Current assets at December 31, 1997, totaled approximately $7.6 million,
an increase of approximately $2.7 million from December 31, 1996, attributable
primarily to an increase in cash from the completion of the Exchange Offer.
Current liabilities at December 31, 1997, totaled approximately $2.3 million,
an increase of $1,473,000 from December 31, 1996, including a customer deposit
of approximately 1.0 million.
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 Debentures for cash. In
December 1997, the Company exchanged the $5.5 million in Debentures for equity
in the Exchange Offer and raised an additional $7.5 million in cash from the
exercise of warrants attached to the conversion of such Debentures. As of
December 31, 1997 and 1996, the Company had approximately $6.4 million and
$4.8 million in cash and cash equivalents, respectively, and $2.7 million and
$5.3 million of working capital, respectively. The change in cash and working
capital were primarily the result of the net proceeds of the Exchange Offer of
$6.2 million offset by cash used in operations of $3.8 million and the
purchase of software for $0.7 million.
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 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 software 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. 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.
24
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The Company is not subject the requirement to file selected quarterly
financial data under item 302 of Regular S-K.
The consolidated financial statements and schedules required hereunder
and contained herein are listed under Item 14(a) below.
ITEM 9. CHANGES IN AND DISAGREEMNENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
25
<PAGE>
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Pursuant to General Instructions G(3) of Form 10-K, the information
called for by this Item regarding director's is hereby incorporated by
reference from the Company's definitive proxy statement or amendment hereto to
be filed pursuant to Regulation 14A not later than 120 days after the end of
the fiscal year covered by this report. Information regarding the Company's
executive officers is set forth under Item 4A of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
Pursuant to General Instruction G(3) of form 10-K, the information
called for by this item hereby incorporated by reference from the Company's
definitive proxy statement or amendment hereto to be filed pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year
covered by this report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENFICIAL OWNERS AND MANAGEMENT.
Pursuant to General Instruction G(3) of form 10-K, the information
called for by this item hereby incorporated by reference from the Company's
definitive proxy statement or amendment hereto to be filed pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year
covered by this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Pursuant to General Instruction G(3) of form 10-K, the information
called for by this item hereby incorporated by reference from the Company's
definitive proxy statement or amendment hereto to be filed pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year
covered by this report.
26
<PAGE>
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K.
EXHIBIT AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 27 - Financial Data Schedule
(b) REPORTS ON FORM 8-K
None
27
<PAGE>
Exhibit
No. Description
------- -----------
2.1 Stock Purchase Agreement among ZMAX Corporation, Michael C.
Higgins and Michael S. Cannon, dated November 6, 1996, for the
acquisition of Century Services, Inc. (Incorporated herein by
reference to Exhibit 2.1 to the Registrant's Registration
Statement on Form S-4 (File No. 333-29833).)
2.2 Agreement and Plan of Merger between ZMAX Corporation and New ZMAX
Corporation, dated June 10, 1997. (Incorporated herein by
reference to Exhibit 2.2 to the Registrant's Registration
Statement on Form S-4 (File No. 333-29833).)
3.1 Amended and Restated Certificate of Incorporation of ZMAX
Corporation. (Incorporated herein by reference to Exhibit 3.5 to
the Registrant's Registration Statement on Form S-4 (File No.
333-29833).)
3.2 Bylaws of ZMAX Corporation. (Incorporated herein by reference to
Exhibit 3.6 to the Registrant's Registration Statement on Form S-4
(File No. 333-29833).)
4.1 Form of Warrant to Purchase Common Stock of ZMAX Corporation.
(Incorporated herein by reference to Exhibit 4.2 to the
Registrant's Registration Statement on Form S-4 (File No.
333-29833).)
10.1 ZMAX Corporation 1997 Stock Incentive Plan. (Incorporated herein
by reference to Exhibit 10.1 to the Registrant's Registration
Statement on Form S-4 (File No. 333-29833).)*
10.2 Form of ZMAX Corporation 1997 Non-qualified Stock Option Award
(form of grant and vesting schedule). (Incorporated herein by
reference to Exhibit 10.2 to the Registrant's Registration
Statement on Form S-4 (File No. 333-29833).)*
10.3 ZMAX Corporation 1997 Directors Formula Stock Option Plan.
(Incorporated herein by reference to Exhibit 10.3 to the
Registrant's Registration Statement on Form S-4 (File No.
333-29833).)*
10.4 Form of ZMAX Corporation Directors Formula Stock Option Award
(form of grant and vesting schedule). (Incorporated herein by
reference to Exhibit 10.4 to the Registrant's Registration
Statement on Form S-4 (File No. 333-29833).)*
10.5 Employment Agreement between Century Services, Inc. and Michael C.
Higgins, dated November 6, 1996. (Incorporated herein by reference
to Exhibit 10.5 to the Registrant's Registration Statement on Form
S-4 (File No. 333-29833).)*
* Management contract of compensatory plan.
<PAGE>
10.6 First Amendment to the Employment Agreement between Century
Services, Inc. and Michael C. Higgins, dated May 21, 1997.
(Incorporated herein by reference to Exhibit 10.6 to the
Registrant's Registration Statement on Form S-4 (File No.
333-29833).)*
10.7 Employment Agreement between Century Services, Inc. and Joseph
Yeh, dated June 18, 1997. (Incorporated herein by reference to
Exhibit 10.7 to the Registrant's Registration Statement on Form
S-4 (File No. 333-29833).)*
10.8 Separation Agreement between Century Services, Inc. and Michael S.
Cannon, dated April 22, 1997. (Incorporated herein by reference to
Exhibit 10.8 to the Registrant's Registration Statement on Form
S-4 (File No. 333-29833).)*
10.9 Consulting Agreement among ZMAX Corporation, MBY, Inc. and Michel
Berty, dated April 1, 1997. (Incorporated herein by reference to
Exhibit 10.9 to the Registrant's Registration Statement on Form
S-4 (File No. 333-29833).)*
10.10 Consulting Agreement among ZMAX Corporation, Wareham Management
Ltd. and G.W. Norman Wareham, dated May 30, 1997. (Incorporated
herein by reference to Exhibit 10.10 to the Registrant's
Registration Statement on Form S-4 (File No. 333-29833).)*
10.11 Consulting Agreement between ZMAX Corporation and Shafiq Nazerali,
dated May 30, 1997. (Incorporated herein by reference to Exhibit
10.11 to the Registrant's Registration Statement on Form S-4 (File
No. 333-29833).)*
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. (Incorporated herein by reference to
Exhibit 10.12 to the Registrant's Registration Statement on Form
S-4 (File No. 333-29833).)
10.13 ZMAX Corporation Stockholders Agreement among Michael C. Higgins,
Michael S. Cannon and ZMAX Corporation, dated November 6, 1996.
(Incorporated herein by reference to Exhibit 10.13 to the
Registrant's Registration Statement on Form S-4 (File No.
333-29833).)
10.14 Stock Pledge and Security Agreement from Michael C. Higgins in
favor of ZMAX Corporation, dated November 6, 1996. (Incorporated
herein by reference to Exhibit 10.14 to the Registrant's
Registration Statement on Form S-4 (File No. 333-29833).)
* Management contract of compensatory plan.
<PAGE>
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. (Incorporated
herein by reference to Exhibit 10.15 to the Registrant's
Registration Statement on Form S-4 (File No. 333-29833).)
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. (Incorporated
herein by reference to Exhibit 10.16 to the Registrant's
Registration Statement on Form S-4 (File No. 333-29833).)
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, as amended. (Incorporated herein by reference to Exhibit
10.17 to the Registrant's Registration Statement on Form S-4 (File
No. 333-29833).)
10.18 Conversion Agreement between Fiserv Federal Systems, Inc. and ZMAX
Corporation, dated April 28, 1997. (Incorporated herein by
reference to Exhibit 10.18 to the Registrant's Registration
Statement on Form S-4 (File No. 333-29833).)
10.19 Agreement between ZMAX Corporation and Investor Communications
Company, LLC, dated as of May 20, 1997. (Incorporated herein by
reference to Exhibit 2.2 to the Registrant's Registration
Statement on Form S-4 (File No. 333-29833).)
10.20 Investor Relations Consulting Agreement between ZMAX Corporation
and Investor Communications Company, LLC, dated as of May 20,
1997. (Incorporated herein by reference to Exhibit 10.20 to the
Registrant's Registration Statement on Form S-4 (File No.
333-29833).)
21 Subsidiaries of ZMAX Corporation
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule
<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 30, 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
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons, on behalf of the
Registrant and in the capacities and on the dates indicated.
Dated: March 30, 1998 /s/MICHEL BERTY
-----------------------------
Michel Berty
Director and Chairman of the
Board
Dated: March 30, 1998 /s/MICHAEL C. HIGGINS
-----------------------------
Michael C. Higgins
Director, President and Chief
Executive Officer
Dated: March 30, 1998 /s/G.W. NORMAN WAREHAM
-----------------------------
G.W. Norman Wareham
Director, Vice President -
Chief Financial Officer,
Secretary and Treasurer
Dated: March 30, 1998 /s/STEVE L. KOMAR
-----------------------------
Steve L. Komar
Director
Dated: March 30, 1998 /s/EDWARD YOURDON
-----------------------------
Edward Yourdon
Director
Dated: March 30, 1998 /s/TED FINE
-----------------------------
Ted Fine
Director
28
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Report of Arthur Andersen LLP, Independent Public Accountants F-1
Consolidated Balance Sheets as of December 31, 1997
and 1996 F-2
Consolidated Statements of Operations for the years ended
December 31, 1997 and 1996, and for the period from
December 13, 1995 (Date of Inception) to December 31,
1995 F-4
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1997 and 1996, and for
the period from December 13, 1995 (Date of Inception) to
December 31, 1995 F-5
Consolidated Statements of Cash Flow for the years Ended
December 31, 1997 and 1996, and for the period from
December 13, 1995 (Date of Inception) to December 31,
1995 F-6
Notes to Consolidated Financial Statements F-7
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To ZMAX Corporation:
We have audited the accompanying consolidated balance sheets of ZMAX
Corporation (a Delaware corporation) and its subsidiary as of December 31,
1997 and 1996 and the related statements of operations, stockholders' equity
and cash flows for the years ended December 31, 1997 and 1996 and the period
from December 13, 1995 (Date of Inception) to December 31, 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 about 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
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
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, 1997 and 1996, and the results of its
operations and its cash flows for the years ended December 31, 1997 and 1996
and the period from December 13, 1995 (Date of Inception) to December 31,
1995, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
March 27, 1998
F-1
<PAGE>
<TABLE>
ZMAX CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
----------------------
ASSETS:
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 6,405,084 $ 4,842,169
Accounts receivable 1,067,258 -
Prepaid expenses and other assets 81,506 27,762
------------ ------------
Total current assets 7,553,848 4,869,931
------------ ------------
Property, plant and equipment, net 277,981 20,871
Intangible assets, net 4,033,265 2,274,406
Deferred financing costs, net - 1,426,834
Other assets 4,983 -
------------ ------------
Total assets $11,870,077 $ 8,592,042
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE BALANCE SHEETS.
F-2
<PAGE>
<TABLE>
ZMAX CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<CAPTION>
DECEMBER 31,
----------------------------
1997 1996
----------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued expenses 826,117 370,175
Customer deposits 926,039 -
Convertible notes - 1,508,892
Current portion of long-term debt 539,541 265,330
------------- -------------
Total current liabilities 2,291,697 2,144,397
------------- -------------
Convertible exchangeable subordinated
debentures - 5,500,000
Long-term debt, net of current portion - 527,857
Deferred income taxes - -
------------- -------------
Total liabilities 2,291,697 8,172,254
------------- -------------
Commitments and contingencies (Notes 5, 9, 10 and 11)
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, 11,729,714 and
7,000,079 shares issued and outstanding
as of December 31, 1997 and 1996,
respectively, 479,801 and 775,808 shares
subject to cancellation agreements as of
December 31, 1997, and 1996,
respectively (Note 8) 11,729 7,000
Additional paid-in capital 35,280,105 6,724,964
Issuable common stock, 904,365 shares as
of December 31, 1996 (Note 3) - 5,299,579
Receivable for stock subscription (Note 3) - (105,000)
Accumulated deficit (25,713,454) (11,506,755)
------------- -------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-3
<PAGE>
ZMAX CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Period
from December 13,
1995 (Date of
Inception) to
For the Year Ended December 31, December 31,
--------------------------------- ---------------
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Revenues $ 1,425,360 $ - $ -
Operating Expenses:
Cost of revenues 667,098 - -
Sales and marketing 1,110,655 228,803 -
General and administrative 4,148,421 1,069,681 -
Amortization and depreciation 1,008,864 193,533 -
--------------- --------------- ---------------
Loss from operations (5,509.68) (1,492,017) -
Other income (expense):
Interest income 137,814 14,248 -
Interest expense (1,366,479) (7,125,386) -
Other (Notes 3 and 6) (7,468,356) (2,903,600) -
--------------- --------------- ---------------
Net loss before benefit
for income taxes (14,206,699) (11,506,755) -
Benefit for income taxes - - -
Net loss $ (14,206,699) $ (11,506,755) $ -
--------------- --------------- ---------------
Basic and Diluted net loss per share $ (2.58) $ (13.45) $ -
--------------- --------------- ---------------
Basic and diluted weighted average
shares outstanding 5,502,668 855,712 400,000
=============== =============== ===============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-4
<PAGE>
ZMAX CORPORATION AND SUBSIDIARY
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES OF STOCKHOLDERS' EQUITY
<CAPTION>
Common Stock
-------------------------- Paid-In Common
Shares Amount Capital Stock
------------- ---------- -------------- -------------
<S> <C> <C> <C> <C>
Balance, December 13, 1995 (Date of inception) - $ - $ - $ -
Initial capitalization 400,000 400 (200) -
------------- ---------- -------------- -------------
Balance, December 31, 1995 400,000 400 (200) -
Adjustment to record existing capitalization of
public shell company November 6, 1996, 234365
shares issuable 3,800,079 3,800 807,964 1,373,379
Common stock issued in escrow in connection with
the CSI recapitalization 2,800,000 2,800 (2,800) -
Common stock issuable in connection with the CSI
recapitalization, 320,000 shares - - - 1,875,200
Common stock issuable in connection with the CSI
recapitalization, 350,000 shares -
- - - 2,051,000
Stock compensation expense - - 300,000 -
Allocation of proceeds of Notes to beneficial
conversion feature 120,000
Allocation of proceeds of Debentures to
beneficial conversion feature - - 5,500,000 -
Net loss - - - -
------------- ---------- -------------- -------------
Balance, December 31, 1996 7,000,079 7,000 6,724,964 5,299,579
-------------
Cancellation of shares (296,007) (296) 296 -
Conversion of Notes 1,600,000 1,600 2,098,400 -
Settlement of a note for common stock 32,077 32 507,186 -
Common stock issued in connection with the
COCACT software purchase 150,000 150 1,931,100 -
Common stock issued for services 60,000 60 547,440 -
Issuance of previously issuable shares 904,365 904 5,298,675 (5,299,579)
Exchange of convertible exchangeable
subordinated debentures and exercise of 2,279,200 2,279 18,172,044 -
warrants
Net loss - - - -
------------- ---------- -------------- -------------
Balance, December 31, 1997 11,729,714 $ 11,729 $ 35,280,105 $ -
============= ========== ============== =============
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES OF STOCKHOLDERS' EQUITY (Continued)
<CAPTION>
Stock Accumulated
Subscription Deficit Total
-------------- --------------- --------------
<S> <C> <C> <C>
Balance, December 13, 1995 (Date of inception) $ - $ - $ -
Initial capitalization (200) - -
-------------- --------------- --------------
Balance, December 31, 1995 (200) - -
Adjustment to record existing capitalization of
public shell company November 6, 1996, 234365
shares issuable 200 - 2,185,343
Common stock issued in escrow in connection with
the CSI recapitalization - - -
Common stock issuable in connection with the CSI
recapitalization, 320,000 shares - - 1,875,200
Common stock issuable in connection with the CSI
recapitalization, 350,000 shares (105,000) - 1,946,000
Stock compensation expense - - 300,000
Allocation of proceeds of Notes to beneficial
conversion feature 120,000
Allocation of proceeds of Debentures to
beneficial conversion feature - - 5,500,000
Net loss - (11,506,755) (11,506,755)
-------------- --------------- --------------
Balance, December 31, 1996 (105,000) (11,506,755) 419,788
Cancellation of shares - - -
Conversion of Notes - - 2,100,000
Settlement of a note for common stock - - 507,218
Common stock issued in connection with the
COCACT software purchase - - 1,931,250
Common stock issued for services - - 547,500
Issuance of previously issuable shares 105,000 - 105,000
Exchange of convertible exchangeable
subordinated debentures and exercise of - - 18,174,323
warrants
Net loss - (14,206,699) (14,206,699)
-------------- --------------- --------------
Balance, December 31, 1997 $ - $(25,713,454) $ 9,578,380
============== =============== ==============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-5
<PAGE>
ZMAX CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Period
from December 13,
1995 (Date of
Inception) to
For the Years Ended December 31, December 31,
--------------------------------- ---------------
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(14,206,699) $(11,506,755) $ -
Adjustments to reconcile loss to net cash
Depreciation and amortization expense 1,008,864 176,137 -
Amortization of deferred financing costs 508,363 185,767 -
Amortization of discount on Notes and
Debentures 591,408 7,008,592 -
Non-cash expenses related to CSI
recapitalization - 2,883,600 -
Expense related to conversion of Debentures 7,370,000 - -
Stock compensation expense 547,500 300,000 -
Non-cash interest expense on promissory
note 8,904 - -
Loss on conversion of promissory note 101,442 - -
Changes in assets and liabilities
Accounts receivable (1,067,258) - -
Prepaid expenses and other assets (58,727) (27,762) -
Accounts payable and accrued expenses 455,942 72,966 110,000
Customer deposits 926,039 - -
------------- -------------- -------------
Net cash (used in) provided by
operating activities (3,814,222) (907,455) 110,000
------------- -------------- -------------
Net cash used in investing activities:
Purchases of property and equipment (326,145) (21,144) -
Purchases of software (767,379) (831,892) (110,000)
------------- -------------- -------------
Net cash used in investing activities (1,093,524) (853,036) (100,000)
------------- -------------- -------------
Net cash provided by financing activities:
Proceeds from issuance of convertible notes - 120,000 -
Proceeds from issuance of convertible
exchangeable Subordinated debentures - 5,500,000 -
Proceeds from the issuance of common stock 105,000 - -
Net proceeds from the exchange and exercise
of warrants 6,234,607 - -
Deferred financing costs - (675,000) -
Net borrowings (payments) on long-term debt 131,054 408,487 -
Cash acquired in CSI recapitalization - 299,173 -
Advances from joint venture and ZMAX prior
to the CSI recapitalization - 950,000 -
Net cash provided by financing
activities 6,470,661 6,602,660 -
-------------
Net increase in cash 1,562,915 4,842,169 -
-------------
Cash, beginning of period 4,842,169 - -
-------------
Cash, end of period $ 6,405,084 $ 4,842,169 $ -
=============
Supplemental cash flow information:
Cash paid for-
Interest $ 299,668 $ 26,599 $ -
Income taxes $ - $ - $ -
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-6
<PAGE>
ZMAX CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION, ORGANIZATION AND NATURE OF OPERATIONS:
BASIS OF PRESENTATION
On November 6, 1996, ZMAX Corporation ("ZMAX" or the "Company"), 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 since the acquisition on November 6, 1996. All
significant inter-company amounts have been eliminated.
Prior to the year ended December 31, 1997, ZMAX and its subsidiary, CSI
(together 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."
ORGANIZATION OF ZMAX
ZMAX was originally incorporated as a Nevada corporation on April 24, 1986,
under its prior name of Pandora, Inc. ("Pandora"), for the purpose of
obtaining capital to seek out, investigate and acquire interests in products,
properties and businesses which, in the opinion of management, may have had
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 its name to Oryx Gold
Corporation ("Oryx") in connection with a reorganization in which Oryx
acquired 100 percent 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. However, the Company did
not subsequently pursue that business. American Oil's corporate status was
suspended by the Secretary of State of Nevada as of December 1, 1995, and that
subsidiary has been abandoned. On August 9, 1996, Mediterranean changed its
name to ZMAX Corporation.
F-7
<PAGE>
MERGER (THE "MERGER")
In December 1997, ZMAX (a Nevada corporation) merged 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 became effective, each outstanding share of common stock, $0.001
par value, of ZMAX was converted into one share of common stock, $0.001 par
value, of New ZMAX. New ZMAX is the surviving corporation in the Merger, and
CSI is thereby a wholly owned subsidiary of New ZMAX. At the effective time of
the Merger, the name of New ZMAX was changed to "ZMAX Corporation" pursuant to
the Merger Agreement.
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. 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 will 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 problems following
completion of millennium conversions could necessitate significant
expenditures by the Company to remedy the problem. The consequences of
failures, errors or problems could materially and adversely affect the
Company's business, operating results and financial condition.
The Company's operations are subject to certain risks and uncertainties,
including among others, rapidly changing technology, uncertain 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 common stock. The potential volatility of the stock price is
demonstrated by the quoted market price compared to the prices in the CSI
recapitalization transactions.
F-8
<PAGE>
2. 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 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. At December 31,
1997, cash and cash equivalents included a $5,003,501 federal agency discount
note that is carried at an amount approximating market value.
REVENUE RECOGNITION
Revenues on time-and-materials contracts are recognized based upon hours
incurred at contract rates plus direct costs. Revenues on fixed-price
contracts are recognized on the percentage-of-completion method based on costs
incurred in relation to total estimated costs. Anticipated losses are
recognized as soon as they become known. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
determined.
Unbilled accounts receivable on time and materials contracts represent costs
incurred and gross profit recognized near the period end but not billed until
the following period. Unbilled accounts receivable on fixed-price contracts
consist of amounts incurred which are not yet billable under contract terms.
At December 31, 1997, unbilled accounts receivable totaled $180,120.
SIGNIFICANT CUSTOMERS
Net revenues from individual customers greater than 10 percent of revenues for
the year ended December 31, 1997 were as follows:
<TABLE>
<S> <C>
Customer A 24%
Customer B 23%
Customer C 13%
</TABLE>
Due to the nature of the Company's business and the relative size of certain
contracts, the loss of any single significant customer could have a material
adverse effect on the Company's results of operations.
F-9
<PAGE>
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to credit risk
consist of cash and cash equivalents and accounts receivable. Accounts
receivable include amounts due from relatively large companies in a variety of
industries. Accounts receivable from individual customers that are greater
than 10 percent of consolidated accounts receivable were as follows as of
December 31, 1997:
<TABLE>
<S> <C>
Customer A 31%
Customer B 31%
Customer C 17%
</TABLE>
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.
BASIC AND DILUTED NET LOSS PER SHARE
In March 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 128, "Earnings Per Share." SFAS No. 128 is effective for financial
statements issued for periods ending after December 15, 1997. The Company has
implemented SFAS No. 128 for 1997 and has restated prior year amounts. SFAS
F-10
<PAGE>
No. 128 requires dual presentation of basic and diluted earnings per share.
Basic loss per share includes no dilution and is computed by dividing net loss
by the weighted average number of common shares outstanding for the period.
Diluted loss per share includes the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock. For the years ended December 31, 1997 and 1996,
the Company had a loss, therefore the 1,248,000 and 208,126 options
outstanding as of those dates were not included in calculating diluted loss
per share as their effect would have been anti-dilutive. Similarly, because
the effect would have been anti-dilutive, common stock issuable upon the
conversion of the Company's convertible debt were not included in the
calculation of diluted loss per share for 1997 and 1996 until such debt was
converted and the shares were issued. Outstanding shares subject to
cancellation agreements are also not included in either the basic or diluted
calculation. As a result, the basic and diluted loss per share for all periods
presented are identical.
RECLASSIFICATIONS
Certain amounts have been reclassified in the prior year financial statements
to conform with current year presentation.
3. 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 (Note 8), $2,100,000 of convertible notes
(Note 6) and $5,500,000 of convertible exchangeable subordinated debentures
(Note 6).
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 percent 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
equal to the prime rate plus 2 percent. 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.
F-11
<PAGE>
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. In addition to the above consideration, Fiserv
was pledged 3 percent 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 percent ownership interest in
ZMAX to Fiserv.
This transaction has been accounted for as a purchase by ZMAX. ZMAX acquired
the 50 percent 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.
ZMAX allocated the purchase price to assets and liabilities based on their
estimated fair values at the date of acquisition (prior to the CSI
transaction). As a result, ZMAX (prior ot the CSI transaction) allocated
$1,508,379 to goodwill and $560,000 to a receivable from the JV related to
funding provided to the JV by Fiserv which in turn had been advanced to CSI by
the JV. ZMAX had previously recognized a deferred tax liability related to the
differences between the financial statement and tax basis of intangible assets
acquired as a result of the purchase of the joint venture interest. The
Company has subsequently determined that no such basis differences exist and
his reclassified the deferred tax liability against the related intangible
asset in the accompanying financial statements as of December 31, 1997 and
1996.
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-12
<PAGE>
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 the fair value, 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
for the year ended 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 CSI's operations, CSI would enter into
employment agreements with certain executives who were the former stockholders
of CSI that would provide for compensation at specified levels. 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. 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 to the two stockholders of CSI. At the
closing, the former stockholders of CSI retained 400,000 shares of such ZMAX
common stock and deposited their remaining 2,800,000 shares of ZMAX common
stock (the "Restricted Stock") into an escrow subject to quarterly release of
such shares back to the former CSI stockholders based upon the cash flow (as
defined) of CSI. Under the terms of the Stock Purchase Agreement, one share of
Restricted Stock was to be released to such stockholders for every $1.25 of
cash flow generated by CSI. The former CSI stockholders are entitled to vote
the shares of the Restricted Stock as well as to receive their respective pro
rata share of any distributions or dividends declared thereon. The Restricted
Stock is subject to forfeiture under certain conditions (Note 11). The
transaction has been accounted for as a recapitalization of CSI with CSI as
the acquirer (a reverse acquisition).
In March 1998, ZMAX and the former CSI stockholders reformed certain of the
agreements relating to ZMAX's acquisition of CSI to reflect the original
intent of the parties. As a result, the escrow to hold the Restricted Stock
F-13
<PAGE>
was replaced by the former CSI stockholders holding their shares of Restricted
Stock. The amended agreements, however, provide for the lapse of such
restrictions on transferability on November 6, 2001 if such restrictions have
not already been released as a result of the CSI cash flow.
In connection with the CSI transaction, the Company incurred $54,678 of direct
costs that have been charged to expense. The Company also agreed to issue
320,000 shares of ZMAX common stock to a consultant for services related to
the CSI transaction and the 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 value of the other 160,000 shares has been recognized as a
deferred financing cost in the accompanying financial statements.
4. PROPERTY AND EQUIPMENT:
Property and equipment is carried at cost and depreciated over its estimated
useful life, typically three years, using the straight-line method. Leasehold
improvements are depreciated using the straight-line method over their
estimated useful life or the remaining term of the lease, whichever is
shorter.
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1996
----------------------------
<S> <C> <C>
Furniture and fixtures $ 147,653 $ 17,989
Equipment 162,562 3,155
Leasehold improvements 37,075 -
Less- Accumulated depreciation (69,309) (273)
---------- ----------
Property and equipment, net of $ 277,981 $ 20,871
accumulated depreciation
</TABLE>
5. INTANGIBLE ASSETS:
Intangible assets consist of purchased software rights and goodwill acquired
as a result of ZMAX's purchase of Fiserv's interest in the JV. The software
rights and goodwill are being amortized over their estimated useful lives of
five years. Accumulated amortization totaled $1,237,468 and $193,261 as of
December 31, 1997, and 1996, respectively.
During 1996, CSI licensed the rights to three software tools for a total of
$1,010,000. 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"), provided for the exclusive
rights to use the software in North America for a term of ten years (the
"North American COCACT License").
During 1996, the Company paid $560,000 on this obligation, with the remaining
$450,000 due in three equal installments during 1997 and 1998. Interest on
this obligation has been imputed at a rate of 10 percent. During 1997, the
Company made one additional payment of $150,000.
On April 30, 1997, the Company entered into an agreement to purchase all
rights, 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 under the COCACT Purchase Agreement was
$1,100,000, of which $250,000 was paid in May 1997, plus 150,000 shares of
common stock of the Company. The first installment payment of $283,333 was
made in September 1997. The remaining installments of $283,333 are due in
January 1998 and May 1998. Interest on this obligation has also been imputed
at a rate of 10 percent.
As of April 30, 1997, $300,000 under the original North American COCACT
License remained unpaid. 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. ZMAX also has the
right to cancel the COCACT Purchase Agreement in the event the enhancement
project is not completed successfully. 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-14
<PAGE>
6. DEBT AND DEFERRED FINANCING COSTS:
The following details the Company's debt obligations:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1996
----------------------------
<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 - 1,508,592
monthly at 8%
Convertible exchangeable subordinated
debentures, interest payable
semi-annually, at 8% - 5,500,000
----------- -----------
Total 539,541 7,802,079
----------- -----------
Less- Current portion 539,541 (1,774,222)
----------- -----------
$ - $6,027,857
=========== ===========
</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 percent interest in the JV.
In May 1997, the $385,000 note payable and the related accrued interest of
$20,776 were settled by the Company by the issuance of 32,077 shares of ZMAX
common stock to Fiserv. During 1997, a loss of $101,442 was recognized on this
conversion as the fair value of the ZMAX common stock, based upon the quoted
market price at that time, exceeded the carrying amount of the outstanding
principal and accrued interest.
CONVERTIBLE NOTES
In connection with the CSI recapitalization, from September 1996 to October
1996, ZMAX 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 were convertible, at the option of the holder,
into a total of 1,600,000 shares of the Company's common stock. In early 1997,
all of the holders exercised their conversion rights. In March 1997, the Board
of Directors approved the conversion and in April 1997, all of the Notes were
converted into 1,600,000 shares of Company 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 ZMAX common stock at that
time. Accordingly, because the intrinsic value of this beneficial conversion
feature exceeded the amount of the proceeds of the Notes, the entire
$2,100,000 in proceeds from the Notes were 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 was reflected as a charge to interest expense and was recognized over
the period until the Notes became convertible. A total of $1,508,592 in
interest expense was recognized for the year ended December 31, 1996, related
to the discount resulting from the beneficial conversion feature. The
remaining $591,408 in interest expense was recognized in the year ended
December 31, 1997.
F-15
<PAGE>
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 had the right to convert the entire
principal balance of their Debenture. The Company had the right to redeem or
prepay the Debentures provided that the Company had offered to exchange the
Debentures for the Company's common stock and a warrant to purchase additional
common stock and the Company had filed an effective registration statement
pursuant to the Securities Act of 1933, as amended, pertaining to the exchange
offer.
In the event the exchange offer was made during the first six months
immediately following the date of issuance of the Debentures, each $5.00 of
principal would have been exchangeable for one share of Company common stock
plus a warrant to purchase one share of Company common stock. In the event an
exchange offer was made after the first six months immediately following the
date of issuance of the Debentures, each $5.00 of principal would have been
exchangeable for one and one-tenth (1.1) share of Company common stock plus an
equivalent number of warrants.
Upon exchange, the holder receives ZMAX common stock plus, for each share of
ZMAX common stock received, a warrant to purchase one 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 after
the first anniversary of the date of issuance but prior to the second
anniversary. 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 exceeded the amount of the proceeds of the Debentures, the entire
$5,500,000 in proceeds was 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 has been reflected
as a charge to interest expense and has been recognized in December 1996 since
the Debentures were 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.
EXCHANGE OFFER
In November 1997, the Company offered (the "Exchange Offer") to exchange all
of the Debentures under the terms and conditions described above. The Exchange
Offer was accepted by all of the Debenture holders, and each Debenture holder
received 220 shares of Company common stock and a warrant to purchase an
additional 220 shares of Company common stock (the "Warrant Shares") per
$1,000 principal amount of Debentures exchanged. In December 1997, all $5.5
million in Debentures outstanding were exchanged for 1,210,000 shares of
Company common stock and warrants to purchase a total of 1,210,000 shares of
Company common stock. Any accrued but unpaid interest from June 1, 1997, to
the date of the Exchange was waived by the Debenture holders.
F-16
<PAGE>
Because the securities issued pursuant to the terms of the Exchange Offer
included securities in excess of the securities issuable pursuant to the
original conversion terms of the Debentures, the Company recognized $7,370,000
as expense at the time of the Exchange. The amount recognized equaled the fair
value of the incremental number of shares of Company 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.
Concurrent with the Exchange, warrants to purchase 1,069,200 shares of Company
common stock were exercised for $7,484,400 in proceeds to the Company.
Warrants to purchase 140,800 shares of common stock remain outstanding as of
December 31, 1997. Costs of $1,261,606 were incurred in completing the
Exchange Offer. These amounts have been reflected as a reduction to additional
paid-in capital as an offset to the proceeds of the warrant exercises and the
exchange of the Debentures into common stock.
DEFERRED FINANCING COSTS
Deferred financing costs, which were incurred in connection with the issuance
of the Notes and the Debentures, were 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. During the year ended December 31, 1997, additional
amortization expense of $508,363 was recorded prior to the conversion of the
Notes and Debentures. As a result of the exchange of the debentures,
unamortized deferred financing costs of $918,471 were reflected as a reduction
in additional paid-in capital.
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:
F-17
<PAGE>
<TABLE>
<CAPTION>
For the Period
from December 13,
1995 (Date of
Inception) to
For the Year Ended December 31, December 31,
--------------------------------- ---------------
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Income tax benefit:
Current-
Federal $ - $ - $ -
State - -
Deferred-
Federal (1,865,957) (468,323) -
State (349,881) (87,810) -
Valuation allowance 2,215,838 556,133 -
============ ============ =============
$ - $ - $ -
============ ============ =============
</TABLE>
The benefit for income taxes results in effective rates which differ from the
Federal statutory rate as follows.
<TABLE>
<CAPTION>
For the Period
from December 13,
1995 (Date of
Inception) to
For the Year Ended December 31, December 31,
--------------------------------- ---------------
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Statutory federal income tax rate (35.0)% (35.0%) -%
Effect of graduated rates 1.0 1.0 -
Net operating losses for
which no tax benefit is 13.2 4.2 -
currently available
Other increases in valuation allowance 1.5 - -
Non-deductible expenses 19.3 29.8 -
------ ------ -----
- % - % -
</TABLE>
The components of the net deferred tax assets (liabilities) were as follows as
of December 31, 1997 and 1996 (in thousands).
F-18
<PAGE>
<TABLE>
<CAPTION>
----------------------------
1997 1996
----------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 3,344,084 $ 1,380,968
Amortization of Intangible 245,783
Other 15,824 -
------------ ------------
Total deferred tax assets 3,605,691 1,380,968
Deferred tax liabilities:
Depreciation and amortization (15,660) (6,775)
------------ ------------
Net deferred tax asset 3,590,031 1,374,193
Less- Valuation allowance (3,590,031) (1,374,193)
------------ ------------
$ - $ -
============ ============
</TABLE>
The Company has determined that its deferred tax asset did not satisfy the
recognition criteria set forth in SFAS No. 109, and accordingly, established a
valuation allowance for 100 percent of the net deferred tax asset.
For income tax purposes, the CSI transaction has been treated as the
acquisition of CSI by ZMAX. As a result of December 31, 1997, the Company had
net operating losses of approximately $8,800,000 carryforward to offset future
taxable income. These carryforwards expire in years 2001 through 2012. Under
the provision 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 including the CSI transaction, the Company's net operating losses
will be subject to such limitations and may not be available to offset future
income for tax purposes. The Company also has approximately $400,000 in net
operating loss carryforwards as a result of the CSI acquisition that may also
be subject to certain limitations.
8. 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 of ZMAX common stock at $.30 per
share to offshore investors (the "Offshore Placement").The proceeds were used
to repay existing debt of ZMAX (see Note 10 for a discussion of related party
transactions).
F-19
<PAGE>
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 of ZMAX
common stock 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 as of December 31, 1997 for cancellation.
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 11
and 11).
9. STOCK OPTIONS AND STOCK-BASED COMPENSATION:
ZMAX OPTIONS
Prior to the CSI recapitalization, ZMAX granted options to certain of its
officers and directors, some of which were outstanding as of December 31,
1996. In September 1994, the Company granted options to purchase 6,565 shares
of ZMAX common stock to its officers and directors. The options were
contingent upon the optionee providing services to ZMAX as a director,
officer, employee or consultant to the Company. As a result of the termination
of those individuals, all of these options were canceled in 1996. In June
1995, the Company also granted additional options to purchase 15,940 shares of
ZMAX common stock to its officers and directors. During 1996 and 1997, options
to purchase 7,814 and 8,126 shares, respectively, were either canceled or
expired, leaving no options outstanding under these issuances at December 31,
1997.
NON-EMPLOYEE OPTIONS
In September 1996, ZMAX granted options to purchase an aggregate of 200,000
shares of ZMAX common stock 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 recorded $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 issued and the cumulative compensation
expense recorded as of the date the agreement was amended charged to expense
in May 1997.
F-20
<PAGE>
1997 STOCK INCENTIVE PLAN
In May 1997, the Board of Directors adopted the 1997 Stock Incentive Plan (the
"Incentive Plan"). The Stock Incentive Plan was subsequently approved by the
Company's stockholders in December 1997. The purpose of the Incentive Plan is
to provide additional compensation to employees, officers, directors and
consultants of the Company or its affiliates. Under the terms of the Incentive
Plan, 1,700,000 shares of Company common stock have been reserved for issuance
as incentive awards under the Incentive Plan. The number of shares of Company
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 are determined by a committee (the
"Committee") that has been selected by the Board of Directors. The Incentive
Plan permits the Committee to make awards of a variety of equity-based
incentives as described below (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 not less than 110 percent of the fair market value if the
participant controls more than 10 percent 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; provided, however, that
no option may be exercised 10 years after the date of grant.
In addition to stock options, the Incentive Plan also allows for the grant of
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. In April
1997, the Company granted non-qualified stock options to purchase 1,200,000
shares of Company common stock under the Incentive Plan to certain officers
and employees. These options had an exercise price of $14.31 per share, expire
ten years after the date of grant, and will become fully vested after seven
years, although vesting may be accelerated provided that certain revenue
targets are achieved by the Company. As of December 31, 1997, options to
purchase 100,000 shares of Company common stock were vested. ("See Note 13
Subsequent Event herein for information regarding an amendment for this plan")
On February 4, 1998 the Company's Board of Director's amended the Incentive
Plan to permit the adjustment of the terms and conditions of outstanding
options. On March 13, 1998, the Company and the four optionees holding such
option agreements to purchase 1,200,000 shares of Company common stock for
$14.31 per share under the Company's Stock Incentive Plan entered into
amendments to such stock options whereby the option exercise price was reduced
to $5.75 per share, the fair market value of the Company's common stock on
that date, and reduced the number of shares of Company common stock underlying
each such option being reduced by 25 percent. Further, two optionees who
previously had the right to exercise a portion their options agreed that such
options would not be exercisable until January 1, 1999
F-21
<PAGE>
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 Company common stock to underlie stock options granted under
the Director Plan. Any shares associated with any forfeited options are added
back to the number of shares that can underlie stock options to be granted
under the Director Plan.
The awards of stock options under the Director Plan are determined by the
express terms of the Director Plan. The Director Plan is administered by a
committee (the "Committee"), the members of which have been appointed by the
Board of Directors. The Committee consists of 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 has 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 non-employee 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 to purchase 12,000 shares of Company
common stock upon a non-employee director's initial appointment after May 20,
1997, to the Board of Directors. The non-employee director will vest
immediately as to 8,000 shares of Company common stock underlying such option
and will vest as to an additional 2,000 shares after the director's completion
of the first year of continued service to the Company and will vest as to the
remaining 2,000 shares after the completion of the second year of continued
service to the Company. 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 any shorter period that may be
provided in the agreement. On May 20, 1997, stock options to purchase an
aggregate of 36,000 shares of Company common stock were granted under the
terms of the Director Plan to three eligible directors. The exercise price of
these options was $14.06 per share. On December 8, 1997, an additional option
to purchase 12,000 shares of Company common stock was granted to another
director with an exercise price of $12.00 per share. The vesting schedule and
exercise period is in accordance with the terms described above. As of
December 31, 1997, stock options to purchase 32,000 shares of Company common
stock were fully vested in accordance with the terms of the Director Plan.
The following is a summary of ZMAX options granted prior to and since the CSI
recapitalization.
<TABLE>
<CAPTION>
Weighted
Average
Number of Option Price Exercise Price
Shares Range
============== ================== ===============
<S> <C> <C> <C>
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
Granted 1,248,000 12.00-14.31 14.28
Canceled or expired (208,126) 5.00-40.00 11.00
============== ================== ===============
Outstanding, December 31, 1997 1,248,000 $12.00-14.31 $14.28
============== ================== ===============
</TABLE>
F-22
<PAGE>
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock Based
Compensation.". 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 persons who are not
employees and 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 under the fair value based method; however,
the employee and director options granted in 1997 were accounted for under the
intrinsic value method as defined by APB Opinion No. 25. Accordingly, proforma
disclosures are presented for 1997 option grants only.
Had compensation expense been determined based on the fair value of the
options at the grant dates consistent with the method of accounting under SFAS
No. 123, the Company's net loss and net loss per share would have been
increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
For the
Year Ended
December 31, 1997
-----------------
<S> <C>
Net loss:
As reported $(14,206,699)
Pro forma $(15,465,379)
Pro forma basic and diluted
net loss per share:
As reported $(2.58)
Pro forma $(2.81)
</TABLE>
The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions used for
grants during the year ended December 31, 1997: no dividend yield, expected
volatility of 70 percent, risk-free interest rates from 5.87 percent to 6.84
percent and an expected term from 3 to 7 years.
F-23
<PAGE>
10. 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 the Company's
common stock for services related to the CSI transaction and related financing
(Note 3). 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 retained this individual as a consultant at $10,000 per month through
December 1997. 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. During 1997, this
individual received $120,000 in consulting fees and was also reimbursed
approximately $8,700 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
for services rendered for the year ended December 31, 1996.
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. For the years ended December 31, 1997 and 1996,
the Company incurred approximately $42,000 and $12,000, respectively, in
consulting expenses for services rendered.
11. COMMITMENTS AND CONTINGENCIES:
LEASES
The Company is party to a sub-lease which commenced in 1996 for a four year
term for space at its Germantown, Maryland headquarters. The remaining
payments due as a result of this obligation are as follows:
<TABLE>
<S> <C>
1998 $154,203
1999 163,254
2000 135,755
Total $453,212
=========
</TABLE>
EMPLOYMENT AND CONSULTING AGREEMENTS
In November 1996, CSI 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 extend for a period of three years until November
1999.
One of the former stockholders of CSI resigned as an employee of the Company
in April 1997. Pursuant to the terms of his employment agreement and a
separation agreement with CSI, he is collecting severance payments from the
Company in the amount of $100,000 per year through November 1999. This
individual is still entitled to receive his pro rata share of the Restricted
Stock as it is released from its restrictions on transfer, provided that he
does not violate the non-compete, non-solicitation, or proprietary information
restrictions contained in his original employment agreement.
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 his amended employment agreement, this employee
will receive a base salary plus a bonus of up to 100 percent of his base
salary, if the Company reaches certain specified levels of revenue and
profitability. No such bonus was earned in 1997. 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 this employment agreement is
terminated by the death or permanent disability (as defined in the agreement)
of this 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 non-compete and non-solicitation
provisions for a period of two years after termination of his employment
agreement.
In order to ensure that CSI had adequate funds to pay the compensation of
these two persons under their original employment agreements, the Company
placed $200,000 in escrow in November 1996. Each month beginning in December
1996, $16,667 was released from escrow to the operating account of CSI to pay
the monthly amount due to these two persons. Accordingly, as of December 31,
1996, $184,016 represents restricted cash and is included in the cash balance.
As of December 31, 1997, all amounts had been released from escrow.
F-24
<PAGE>
In June 1997, the Company entered into a three-year employment agreement with
its Senior Vice President, Technology. Under the terms of such agreement, this
employee will receive a bonus of up to 100 percent of his base salary if the
Company reaches certain specified levels of financial performance. No such
bonus was earned in 1997. 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 such 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 either one year or the remaining term of the
agreement. The agreement also contains non-compete and non-solicitation
provisions extending from the commencement of the agreement until two years
after the termination of the agreement.
STOCKHOLDERS' AGREEMENT
In November 1996, the former stockholders of CSI entered into a stockholders'
agreement with the Company. Under this agreement, the former CSI stockholders
may not sell, pledge, encumber, give, bequeath, or otherwise transfer or
dispose of any of the 3,200,000 shares of Company common received by them from
ZMAX in the CSI transaction, unless such person complies with the terms of the
agreement or obtains the prior written consent of the Company. In the event
either such stockholder receives a qualified offer (as defined in the
agreement) from a third-party purchaser, that stockholder must notify the
Company of the offer and the Company has an option to elect to purchase from
that selling stockholder the shares of Company common stock which are the
subject of the qualified offer and under the same terms contained in the
qualified offer.
The stockholders also previously 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 his employment agreement, the stockholder must
offer to sell all of his stock to the Company. The Company has the 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 must offer
his stock for sale to the Company at a price designated by the offering
stockholder and the Company 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 either such stockholder dies, the Company will have the
option to purchase, and that stockholder's estate will be required to sell,
all of the stock of such stockholder at the current value price (as defined).
Any Restricted Stock subsequently received by a stockholder's estate will be
subject to this provision at the time of the release of the transfer
restrictions applicable to such shares of Restricted Stock.
Under the terms of the stockholders' agreement, the Company common stock owned
by these two stockholders 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, being November 6, 1996. The restrictions apply to any
additional shares of Company common stock acquired after the execution of the
stockholders' agreement.
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 Oryx Gold 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. The plaintiffs have
alleged damages of approximate $87,000. The Company believes the complaint is
without legal merit and will vigorously defend itself.
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-25
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001034760
<NAME> ZMAX CORPORATION
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 6,405,084
<SECURITIES> 0
<RECEIVABLES> 1,067,258
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,553,848
<PP&E> 347,290
<DEPRECIATION> 69,309
<TOTAL-ASSETS> 11,870,077
<CURRENT-LIABILITIES> 2,291,697
<BONDS> 0
0
0
<COMMON> 11,729
<OTHER-SE> 9,566,651
<TOTAL-LIABILITY-AND-EQUITY> 11,870,077
<SALES> 1,425,360
<TOTAL-REVENUES> 1,425,360
<CGS> 667,098
<TOTAL-COSTS> 667,098
<OTHER-EXPENSES> 13,598,482
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,366,479
<INCOME-PRETAX> (14,206,699)
<INCOME-TAX> 0
<INCOME-CONTINUING> (14,206,699)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,206,699)
<EPS-PRIMARY> (2.58)
<EPS-DILUTED> (2.58)
</TABLE>
EXHIBIT 21
<TABLE>
List of Subsidiaries of ZMAX Corporation
<S> <C>
ZMAX Corporation E.I.N. 52-2040275
Century Services, Inc. E.I.N. 52-1958156
</TABLE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
and to all references to our firm included in or made a part of this annual
report on form 10-K.
/s/ARTHUR ANDERSEN LLP
Washington, D.C.
March 30, 1998
