SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________
Commission file number 000-23967
ZMAX CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 52-2040275
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
20251 CENTURY BLVD. GERMANTOWN, MD 20874
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (301) 353-9500
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Former name, former address and former fiscal year, if changed since last
report.
Indicate by check whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of August 1,
1998; 11,729,714 shares of common stock, $.001 par value per share.
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ZMAX CORPORATION
INDEX
<TABLE>
<CAPTION>
Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 1998
(unaudited) and December 31, 1997 1
Consolidated Statements of Operations for the three and six
months ended June 30, 1998 and 1997 (unaudited) 2
Consolidated Statements of Cash Flows for the three and six
months ended June 30, 1998 and 1997 (unaudited) 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security holders 13
Item 5. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
</TABLE>
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PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ZMAX CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
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(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash $ 4,625,988 $ 6,405,084
Accounts Receivable 2,498,637 1,067,258
Prepaid and other assets 129,300 81,506
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Total current assets 7,253,925 7,553,848
Property, plant & equipment (net) 309,345 277,981
Intangible assets (net) 3,450,905 4,033,265
Other assets 5,193 4,983
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Total assets $ 11,019,368 $ 11,870,077
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 1,185,643 $ 826,117
Current portion of long-term debt - 539,541
Contract deposits 703,071 926,039
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Total current liabilities 1,888,714 2,291,697
Commitments and contingencies (Note 4)
Stockholder's 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 shares issued and
outstanding as of June 30, 1998
and December 31, 1997, 479,801 shares
subject to Cancellation Agreements
as of June 30, 1998 and December 31,
1997. (Note 3). 11,729 11,729
Paid in capital 35,280,105 35,280,105
Retained earnings (26,161,180) (25,713,454)
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Total stockholder's equity 9,130,654 9,578,380
Total liabilities & stockholder's equity $ 11,019,368 $ 11,870,077
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</TABLE>
The accompanying notes are an integral part of these balance sheets.
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ZMAX CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
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1998 1997 1998 1997
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(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues $ 2,502,779 $ 60,750 $ 4,027,103 $ 60,750
Operating expenses:
Cost of sales 843,015 57,144 1,309,823 57,144
Research and development 83,935 - 211,622 -
Sales and marketing 276,037 495,401 541,546 653,149
General and administrative 853,527 1,175,360 1,910,632 2,194,555
Depreciation and amortization 304,239 269,113 625,881 423,843
Income (loss) from operations 142,026 (1,936,268) (572,400) (3,267,941)
Other income (expenses):
Interest income 87,121 58,610 142,552 108,088
Interest expense 8,845 (151,241) 1,990 (1,040,687)
Other (3,987) (101,442) (19,867) (100,224)
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Income (loss) before income taxes 234,005 (2,130,341) (447,726) (4,300,764)
Income tax benefit - 26,094 - 52,190
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Net income (loss) $ 234,005 $ (2,104,247) $ (447,726) $ (4,248,574)
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Basic net income (loss) per share $ 0.02 $ (0.36) $ (0.05) $ (0.92)
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Basic weighted average shares outstanding 11,249,913 5,825,241 9,849,913 4,635,822
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Diluted net income (loss) per share $ 0.02 $ (0.36) $ (0.05) $ (0.92)
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Diluted weighted average shares outstanding 11,488,002 5,825,241 9,849,913 4,635,822
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</TABLE>
The accompanying notes are an integral part of these statements.
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ZMAX CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
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1998 1997 1998 19997
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(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 234,005 $ (2,104,247) $ (447,726) $ (4,248,574)
Adjustments to reconcile loss to net cash
Depreciation and amortization expense 304,239 269,113 625,881 423,843
Amortization of deferred financing costs - 78,133 - 227,100
Amortization of discount on Notes and Debentures - - - 591,408
Stock compensation expense - 247,500 - 547,500
Non-cash interest expense on promissory note - 8,904 - 8,904
Loss on conversion of promissory note - 101,442 - 101,442
Changes in assets and liabilities
Accounts receivable (1,091,327) - (1,431,379) -
Prepaid expenses and other assets (67,951) (158,732) (48,004) (141,083)
Accounts payable and accrued expenses 201,555 434,037 359,586 582,687
Deferred income taxes - (26,094) - (52,190)
Customer deposits (204,478) - (222,968) -
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Net cash used in operating activities $ (623,957) $ (1,149,944) $ (1,164,610) $ (1,958,963)
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Net cash used in investing activities:
Purchases of property and equipment (20,565) (82,105) (74,945) (254,263)
Purchases of software - (767,379) - (767,379)
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Net cash used in investing activities $ (20,565) $ (849,484) $ (74,945) $ (1,021,642)
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Net cash provided by financing activities
Proceeds from the issuance of common stock - 105,000 - 105,000
Net borrowings (payments) on long-term obligations (274,193) 517,419 (539,541) 387,843
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Net cash (used in) provided by financing activities $ (274,193) $ 622,419 $ (539,541) $ 492,843
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Net decrease in cash $ (918,715) $ (1,377,009) $ (1,779,096) $ (2,487,762)
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Cash, beginning of period $ 5,544,703 $ 3,731,416 $ 6,405,084 $ 4,842,169
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Cash, end of period $ 4,625,988 $ 2,354,407 $ 4,625,988 $ 2,354,407
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</TABLE>
The accompanying notes are an integral part of these statements.
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ZMAX CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION, ORGANIZATION, AND NATURE OF OPERATIONS:
BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with Rule 10-01 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments, consisting of normal recurring adjustments, considered
necessary for a fair presentation have been included. These financial
statements should be read in conjunction with the financial statements of ZMAX
Corporation ("ZMAX" or the "Company"), as of December 31, 1997, and the notes
thereto included in the Annual Report on Form 10-K filed by the Company with
the Securities and Exchange Commission. The results of operations for the six
and three months, respectively ended June 30, 1998 are not necessarily
indicative of the results that may be expected for the year ending December
31, 1998. The common stock of ZMAX is currently listed on the SmallCap Market
of the National Association of Securities Dealers, Inc. ("NASD") Automated
Quotation System ("NASDAQ").
NATURE OF OPERATIONS
On November 6, 1996, ZMAX 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
services with a focus on providing a solution to the Year 2000 problem.
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 computer software re-engineering market. The Company
generated its first revenues during 1997. The Company must continue to be
successful in selling it services and recognizing those services as revenue in
order to achieve growth, profitability, and success in the marketplace. There
is no guarantee that the Company will continue to be successful in selling its
services and developing or acquiring new services to market in the future. The
Company may require additional funds that may not be available to it.
The failure of the Company's Year 2000 methodology to function properly
or the existence of significant errors or bugs following completion of
millennium conversions could necessitate significant expenditures by the
Company to remedy the problem. The consequences of failures, errors or bugs
could materially and adversely affect the Company's business, operating
results and financial condition.
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The Company's operations are subject to certain risks and uncertainties,
including among others, rapidly changing technology, uncertain and undeveloped
markets for millennium services, current and potential competitors with
greater financial, technological, production and marketing resources, the need
to develop additional products and services, limited protection of proprietary
information, the risk of third party claims of infringement, potential
contract liability related to the Company's access to key aspects of
customer's computer systems, dependence upon strategic alliances, the need for
additional technical personnel, dependence on key management personnel,
management of growth, uncertainty of future profitability and possible
fluctuations in financial results. In addition, there are risks associated
with the market activity in ZMAX stock.
2. SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
Investments with original maturities of three months or less are
considered cash equivalents for purpose of these financial statements.
REVENUE RECOGNITION
Revenues on time-and-materials contracts are recognized based upon hours
incurred at contract rates plus direct costs. Revenues on fixed-price
contracts are recognized on the percentage-of-completion method based on costs
incurred in relation to total estimated costs. Anticipated losses are
recognized as soon as they become known. 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 consists of amounts incurred which are not yet invoicable under
contract terms. At June 30, 1998, unbilled accounts receivable totaled
approximately $932,000.
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.
EARNINGS (LOSS) PER SHARE
The Company has adopted Statement of Financial Accounting Standard No.
128, "Earnings Per Share" which requires dual presentation of basic and
diluted earnings per share. Basic earnings per share excludes dilution and is
computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution that occurs if securities
or other contracts to issue Common Stock were exercised or converted into
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Common Stock or resulted in the issuance of Common Stock that then shared in
the earnings of the Company. Options and warrants to purchase shares of Common
Stock were not included in the computation of loss per share as the effect
would be antidilutive.
The treasury stock effect of 1,844,000 Options and 140,800 warrants to
purchase shares of Common Stock were included in the computation of income per
share as the effect was dilutive. Outstanding shares subject to cancellation
agreements are not included in the calculation of income or loss per share.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income" and No. 131, "Disclosures about Segments
of an Enterprise and Related Information." These statements become effective
for the Company's 1998 financial statements. The adoption of these new
pronouncements did not impact the Company's results of operations, financial
position or cash flows.
3. COMMON STOCK AND PREFERRED STOCK:
STOCK SUBJECT TO CANCELLATION
In September 1995, ZMAX entered into stock cancellation agreements with
certain stockholders that provided for the cancellation of 775,808 shares of
ZMAX common stock. In March 1997, 296,007 of these shares were returned to the
Company and canceled. An additional 479,801 shares are subject to cancellation
but had not been returned to the Company for cancellation as of June 30, 1998.
STOCK PURCHASE AGREEMENT
On November 6, 1996, a 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 flows (as defined) of CSI. Under the terms of
the Stock Purchase Agreement, one share of Restricted Stock will 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. The transaction was accounted for as a
recapitalization of CSI with CSI as the acquirer (a reverse acquisition).
In 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 original escrow to hold the Restricted
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Stock was replaced by the former CSI stockholders holding their shares of
Restricted Stock subject to the same transferability restrictions based on the
cash flows of CSI. 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.
4. COMMITMENTS AND CONTINGENCIES:
LITIGATION
On April 17, 1997, Alan L. Levine and Canadian Petroleum Corporation
filed suit in the Third Judicial district Court of Salt Lake County, Utah
against the Company (f/k/a Mediterranean Oil Corp., f/k/a Pandora, Inc.) and
John Does. The complaint alleges various common law claims arising from the
alleged untimely failure to remove legends restricting the transferability of
shares of the Company's common stock that had been issued by the Company in
payment of legal fees incurred. The plaintiffs have computed damages in the
approximate amount of $87,000. The Company believes the complaint is without
legal merit and will vigorously defend itself. The Company accrued $40,000 for
legal expenses related to this issue in 1997. As of June 30, 1998, $11,248 had
been incurred for this matter.
The Company is periodically a party to disputes arising from normal
business activities. In the opinion of management, resolution of these matters
will not have a material adverse effect upon the financial position or future
operating results of the Company, and adequate provision for any potential
losses has been made in the accompanying financial statements.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and
results of operations of the Company should be read in conjunction with the
financial statements and the notes thereto which appear elsewhere in this
quarterly report and the Company's Annual Report on Form 10-K for the year
ended December 31, 1997.
The information set forth below includes forward-looking statements
relating to actual results that may differ from projected results. Some
factors that could cause results to differ materially from those projected in
the forward-looking statements are set forth below. Readers are cautioned not
to put undue reliance on forward-looking statements. The Company disclaims any
intent or obligation to update publicly these forward-looking statements,
whether as a result of new information, future events or otherwise.
OVERVIEW
On November 6, 1996, ZMAX acquired all of the outstanding stock of CSI.
Prior to this transaction, ZMAX had no operations and its activities consisted
of efforts to establish or acquire a new business and to raise capital. CSI
was a privately held company formed on December 13, 1995. For financial
reporting purposes, the acquisition has been treated as a recapitalization of
CSI with CSI as the acquirer (a reverse acquisition). The historical financial
statements prior to November 6, 1996 are those of CSI.
CSI markets software re-engineering and 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 software re-engineering and millennium services. In
addition, the Company currently intends to pursue acquisitions in the
information technology industry that will complement CSI.
In view of the development costs relating to CSI's millennium services,
the Company believes the period-to-period comparisons of its financial results
are not necessarily meaningful and should not be relied upon as an indication
of future performance. Specifically, as CSI increases its workforce in order
to meet the future demand for its re-engineering and 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 projects.
Consequently, CSI's revenues and operating results may 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 and
re-engineering 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
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client's software application from a mainframe to a client-server environment.
However, there can be no assurance that the Company will be able to
successfully expand its business beyond the millennium conversion market. The
failure to diversify and develop additional products and services could
materially and adversely affect the Company's business, operating results and
financial condition.
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. The
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 may depend upon
the 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 may depend upon completing the project within the estimated
number of staff hours and within the agreed time frame.
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THE THREE MONTHS ENDED
JUNE 30, 1997
REVENUES. Revenues for the three months period ended June 30, 1998, were
approximately $2,503,000, an increase of approximately $2,442,000 over
revenues of approximately $61,000 for the three months period ended June 30,
1997. The increase in revenues during the second quarter of 1998 was a result
of increased sales activity of Year 2000 remediation and consulting services
by CSI during such period.
GROSS PROFIT. Gross profit for the three months ended June 30, 1998 was
approximately $1,660,000, an increase of approximately $1,656,000, over gross
profit of approximately $4,000 for the three months ended June 30, 1997. The
increase in profitability during the three months ended June 30, 1998 was a
result of increased sales activity of Year 2000 remediation and consulting
services by CSI during such period.
RESEARCH AND DEVELOPMENT. Research and development expenses for the
three months ended June 30, 1998, were approximately $84,000. No research and
development expenses were incurred in the three months ended June 30, 1997.
The Company initiated efforts during the first six months of 1998 to refine
its Year 2000 toolset and to prepare the toolset for potential licensing to
end-users.
SALES AND MARKETING. Sales and marketing expenses for the three months
ended June 30, 1998 were approximately $276,000, a decrease of approximately
$219,000, from the approximately $495,000 in such expenses for the three
months ended June 30, 1997. The decrease in sales and marketing expenses for
the three months of 1998 was primarily attributable to a non-recurring
severance charge that occurred during the three months of 1997.
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GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
three months ended June 30, 1998 were approximately $854,000 a decrease of
approximately $321,000, as compared to approximately $1,175,000 of such
expenses incurred by the Company for the three months period ended June 30,
1997. The decrease in general and administrative expenses for the three months
ended 1998 was primarily attributable to a decrease in professional and
consulting expenses.
OTHER INCOME (EXPENSE). Interest income for the three months ended June
30, 1998 was approximately $87,000, an increase of approximately 28,000, as
compared to approximately $59,000 of such interest income for the three months
ended June 30, 1997. The increase in interest income for the three months
ended June 30, 1998 was primarily attributable to greater amounts of cash.
Interest expense for the three months ended June 30, 1998 was approximately
($9,000), a decrease of approximately $160,000 as compared to approximately
$151,000 of such interest expense for the three months ended June 30, 1997.
The decrease in interest expense for the three months ended 1998 was primarily
attributable to the elimination of interest expense related to the
amortization of the deferred financing costs and the amortization of a
discount on the convertible notes. The convertible notes were converted into
common stock in April 1997.
NET INCOME (LOSS). As a result of the above, the net income for the
three months ended June 30, 1998 was approximately $234,000, an increase of
approximately $2,338,000, as compared to the net loss of approximately
$2,104,000 for the three months ended June 30, 1997. Earnings before interest,
income taxes, depreciation, amortization, and excluding other income expense
("EBITDA") for the three months ended June 30, 1998 was approximately
$446,000, an increase of approximately $2,113,000, as compared to the EBITDA
of ($1,667,000) for the three months ended June 30, 1997.
FOR THE SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO THE SIX MONTHS ENDED JUNE
30, 1997
REVENUES. Revenues for the six months ended June 30, 1998, were
approximately $4,027,000, an increase of approximately $3,966,000, over
revenues of approximately $61,000 for the six months ended June 30, 1997. The
increase was attributable to increased sales activity of Year 2000 remediation
and consulting services by CSI during the first six months of 1998 as compared
to the first six months of 1997 during which the Company had just commenced
operations.
GROSS PROFIT. Gross profit for the six months ended June 30, 1998, was
approximately $2,717,000, an increase of approximately $2,713,000, over gross
profit of approximately $4,000 for the six months ended June 30, 1997. The
increase was attributable to increased sales activity during the first six
months of 1998 as compared to the first six months of 1997 during which the
Company had just commenced operations.
RESEARCH AND DEVELOPMENT. Research and development expenses for the six
months ended June 30, 1998, were approximately $212,000. No research and
development expenses were incurred in the six months ended June 30, 1997. The
Company initiated efforts during the first six months of 1998 to refine its
Year 2000 toolset and to prepare the toolset for potential licensing to
end-users.
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SALES AND MARKETING. Sales and marketing expenses for the six months
ended June 30, 1998 were approximately $542,000, a decrease of approximately
$111,000, from the approximately $653,000 in such expenses for the six months
ended June 30, 1997. The decrease in sales and marketing expenses for the
first six months of 1998 was primarily attributable to a non-recurring
severance charge that occurred during the first six months of 1997.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
six months ended June 30, 1998 were approximately $1,911,000, a decrease of
approximately $284,000, as compared to approximately $2,195,000 of such
expenses incurred by the Company for the six months period ended June 30,
1997. The decrease in general and administrative expenses for the first six
months of 1998 was primarily attributable to a decrease in professional and
consulting expenses.
OTHER INCOME (EXPENSE). Interest income for the six months ended June
30, 1998 was approximately $143,000, an increase of approximately 34,000, as
compared to approximately $108,000 of such interest income for the six months
ended June 30, 1997. The increase in interest income for the first six months
of 1998 was primarily attributable to greater amounts of cash. Interest
expense for the six months ended June 30, 1998 was approximately ($2,000), an
decrease of approximately $1,042,000, as compared to approximately $1,040,000
of such interest expense for the six months ended June 30, 1997. The decrease
in interest expense for the first six months of 1998 was primarily
attributable to the elimination of interest expense related to the
amortization of the deferred financing costs and the amortization of a
discount on the convertible notes. The convertible notes were converted into
common stock in April 1997.
NET INCOME (LOSS). As a result of the above, the net loss for the six
months ended June 30, 1998 was approximately $448,000, a decrease of
approximately $3,801,000, as compared to the net loss of approximately
$4,249,000 for the six months ended June 30, 1997. Earnings before interest,
income taxes, depreciation, amortization, and excluding other income expense
("EBITDA") for the six months ended June 30, 1998 was approximately $54,000,
an increase of approximately $2,898,000, as compared to the EBITDA of
($2,844,000) for the six months ended June 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company, since inception has financed its operations and capital
expenditures through the sale of stock, convertible notes, convertible
exchangeable debentures and the proceeds from the exchange offer and exercise
of the warrants related to the convertible exchangeable debentures. Cash used
in operations during the quarter ended June 30, 1998 was approximately
$624,000, as compared to approximately $1,150,000 during the quarter ended
June 30, 1997. The decrease in cash used in operations during the second
quarter of 1998 was primarily a result of the generation of gross profit.
Capital expenditures were approximately $39,000 for the quarter ended June 30,
1998, as compared to approximately $80,000 during the quarter ended June 30,
1997. The reduction in capital expenditures during 1998 is related primarily
to the leveling off of the initial equipment requirements of the Company.
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<PAGE>
As of June 30, 1998, the Company had working capital of approximately
$5,365,000. The Company's primary source of liquidity consists of
approximately $4,626,000 in cash and cash equivalents and approximately
$2,499,000 in contract receivables.
The market for the Company's products is growing rapidly and the
Company's business environment is characterized by rapid technological
changes. The Company requires substantial working capital to fund its
business, particularly to finance accounts receivable, sales and marketing
efforts, research and development, and capital expenditures. The Company
currently has no commitments for capital expenditures. The Company's future
capital requirements will depend on many factors including the rate of revenue
growth, if any, the timing and extent of spending to support research and
development, technological changes and market acceptance of the Company's
services. The Company believes that its current cash position is sufficient to
meet its capital expenditure and working capital requirements for the near
term; however, the growth and technological change make it difficult for the
Company to predict future liquidity requirements with certainty. Over the
longer term, the Company must successfully execute its plans to generate
significant positive cash flows if it is to sustain adequate liquidity without
impairing growth or requiring the infusion of additional funds from external
sources. Additionally, a major expansion, such as would occur with the
acquisition of a major new subsidiary, might also require external financing
that could include additional debt or equity capital. There can be no
assurance that additional financing, if required, will be available on
acceptable terms, if at all.
OTHER
Inflation has not had a significant effect on the Company's operations,
as increased costs to the Company have generally been offset by increased
prices of products and services sold.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The Company's management believes that its operating and information
systems are Year 2000 compliant. The Company expects no material impact on its
operating and information systems from the Year 2000 issue.
This report contains forward-looking statements setting forth the
Company's beliefs or expectations relating to future revenues and
profitability. Actual results may differ materially from projected or expected
results due to changes in the demand for the Company's products and services,
uncertainties relating to the results of operations, the Company's ability to
implement its provider deployment model, its lengthy sales cycle, dependence
on its major customers, risks associated with rapid technological change and
the emerging services market, potential fluctuations in quarterly results, its
dependence on sole and limited source suppliers and fluctuations in component
pricing and its dependence on key employees and other risks and uncertainties
affecting the technology industry generally. The Company disclaims any intent
or obligation to up-date publicly these forward-looking statements, whether as
a result of new information, future events or otherwise.
12
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
The Company's Annual Meeting of Stockholders was held on May 5, 1998.
The following three persons were elected by the following votes to serve
as Class I directors of the Board of Directors for three years or until their
successors are elected and qualified:
<TABLE>
<CAPTION>
Name Votes For Votes Withheld
---- --------- --------------
<S> <C> <C>
Michael C. Higgins 5,817,695 8,988
G.W. Norman Wareham 5,817,695 8,988
Melvin A. McCubbin 5,817,695 8,988
</TABLE>
Shareholders ratified the selection of Arthur Anderson LLP as the
independent accountants for the Company for the current fiscal year. Such
proposal was approved by a vote of 5,651,415 shares for and 166,265 shares
against, with 9,003 shares abstaining.
ITEM 5. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following exhibits are filed herewith:
11 - Computation of Net Income Per Share
27 - Financial Data Schedule
(b) REPORTS ON FORM 8-K
None
13
<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: August 14, 1998 /s/MICHAEL C. HIGGINS
---------------------
Michael C. Higgins
President
/s/JAMES T. MCCUBBIN
--------------------
James T. McCubbin
Vice President - Principal Financial
and Accounting Officer
Exhibit 11.1
ZMAX CORPORATION AND SUBSIDIARY
CALCULATION OF BASIC AND DILUTED NET LOSS PER SHARE
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
----------------------------------------------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
WEIGHTED AVERAGE SHARE CALCULATIONS
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING:
Weighted average shares of common stock
Outstanding 11,729,714 9,252,228 11,729,714 8,062,809
Less: Weighted average number of escrowed
shares of common stock outstanding - (2,800,000) (1,400,000) (2,800,000)
Less: Weighted average number of shares
subject to cancellation (479,801) (626,987) (479,801) (626,987)
------------- ------------- ------------- -------------
Basic weighted average shares outstanding 11,249,913 5,825,241 9,849,913 4,635,822
============= ============= ============= =============
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic weighted average shares outstanding: 11,249,913 5,825,241 9,849,913 4,635,822
Treasury stock effect of options and warrants
outstanding 238,089 - - -
------------- ------------- ------------- -------------
Diluted weighted average shares outstanding: 11,488,002 5,825,241 9,849,913 4,635,822
============= ============= ============= =============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001040257
<NAME> NEW ZMAX CORP
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 4,625,988
<SECURITIES> 0
<RECEIVABLES> 2,498,637
<ALLOWANCES> 0
<INVENTORY> 134,493
<CURRENT-ASSETS> 7,253,925
<PP&E> 344,179
<DEPRECIATION> 34,834
<TOTAL-ASSETS> 11,019,368
<CURRENT-LIABILITIES> 1,888,714
<BONDS> 0
0
0
<COMMON> 11,729
<OTHER-SE> 9,118,925
<TOTAL-LIABILITY-AND-EQUITY> 11,019,368
<SALES> 2,502,779
<TOTAL-REVENUES> 2,502,779
<CGS> 843,015
<TOTAL-COSTS> 843,015
<OTHER-EXPENSES> (3,987)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (8,845)
<INCOME-PRETAX> 234,005
<INCOME-TAX> 0
<INCOME-CONTINUING> 234,005
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 234,005
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0.02
</TABLE>
